Accounting Information System: An accounting information system (AIS) is a system of

collection, storage and processing of financial and accounting data that is used by decision makers.
An accounting information system is generally a computer-based method for tracking accounting
activity in conjunction with information technology resources. The resulting statistical reports can be
used internally by management or externally by other interested parties including investors,
creditors and tax authorities. The actual physical devices and systems that allows the AIS to operate
and perform its functions
1. Internal controls and security measures: what is implemented to safeguard the data
2. Model Base Management
Angle of incidence: is a measure of deviation of something from "straight on", for example: in the
approach of a ray to a surface, or the angle at which the wing or horizontal tail of an airplane is
installed on the fuselage, measured relative to the axis of the fuselage.

Accounting Assumptions: Accounting have established group of assumptions, those assumptions

are the basics of financial accounting. At the same time, assumptions are not accounting principles,
as they are more of agreed upon rules. Assumptions: Entity unit assumption: as the name indicated,
the business is a separate and distinct from its owner(s), which in effect means that the entity
accounts and finances are totally separated from the financial of owners, and the business is treated
as a person by itself. Going concern assumption: meaning that the business is going to be operated
for non predefined period, in other words, there is no ending date for business life. Monetary unit
assumption: meaning that the business should have one money unit to record its transactions, for
example U.S. dollar. Time period assumption: meaning that business profit or loses are measured on
timely basis, for example one year, six months, 3 months. Consistency: meaning that the business
should use the same accounting techniques, as change of methods used could change the outcome.
Accrual basis: Recognizing non-cash circumstances as they occur.
Accounting ethics is primarily a field of applied ethics, the study of moral values and judgments as
they apply to accountancy. It is an example of professional ethics. Accounting ethics were first
introduced by Luca Pacioli, and later expanded by government groups, professional organizations,
and independent companies. Ethics are taught in accounting courses at higher education institutions
as well as by companies training accountants and auditors.
Due to the diverse range of accounting services and recent corporate collapses, attention has been
drawn to ethical standards accepted within the accounting profession. [2] These collapses have
resulted in a widespread disregard for the reputation of the accounting profession. [3] To combat the
criticism and prevent fraudulent accounting, various accounting organizations and governments have
developed regulations and remedies for improved ethics among the accounting profession
Accounting cycle: The accounting cycle is a methodical set of rules to ensure the accuracy and
conformity of financial statements. Computerized accounting systems have helped to greatly reduce
mathematical errors in the accounting process, but the uniform process of the accounting cycle also
helps reduce mistakes. The name given to the collective process of recording and processing the
accounting events of a company. The series of steps begin when a transaction occurs and end with
its inclusion in the financial statements. The nine steps of the accounting cycle are: Collecting and
analyzing data from transactions and events, Putting transactions into the general journal, Posting
entries to the general ledger, Preparing an unadjusted trial balance. , Adjusting entries appropriately,
Preparing an adjusted trial balance, Organizing the accounts into the financial statements, Closing
the books, Preparing a post-closing trial balance to check the accounts. Also known as "bookkeeping
cycle".
Accounting equation: The equation that is the foundation of double entry accounting. The
accounting equation displays that all assets are either financed by borrowing money or paying with
the money of the company's shareholders. Thus, the accounting equation is: Assets = Liabilities +
Shareholder Equity. The balance sheet is a complex display of this equation, showing that the total
assets of a company are equal to the total of liabilities and shareholder equity. Any purchase or sale
by an accounting equity has an equal effect on both sides of the equation, or offsetting effects on the
same side of the equation. The accounting equation is also written as Liabilities = Assets
Shareholder Equity and Shareholder Equity = Assets Liabilities. In a corporation, capital represents
the stockholders' equity. Since every business transaction affects

at least two of a companys accounts, the accounting equation will always be in balance, meaning
the left side should always equal the right side. Thus, the accounting formula essentially shows that
what the firm owns (its assets) is purchased by either what it owes (its liabilities) or by what its
owners invests (its shareholders equity or capital).Adjusting entries are journal entries recorded at
the end of an accounting period to adjust income and expense accounts so that they comply with the
accrual concept of accounting. Their main purpose is to match incomes and expenses to appropriate
accounting periods.The transactions which are recorded using adjusting entries are not spontaneous
but are spread over a period of time. Not all journal entries recorded at the end of an accounting
period are adjusting entries. For example, an entry to record a purchase on the last day of a period
is not an adjusting entry. An adjusting entry always involves either income or expense account.
There are following types of adjusting entries: Accruals:
These include revenues not yet received nor recorded and expenses not yet paid nor recorded. For
example, interest expense on loan accrued in the current period but not yet paid. Prepayments:
These are revenues received in advance and recorded as liabilities, to be recorded as revenue and
expenses paid in advance and recorded as assets, to be recorded as expense. For example,
adjustments to unearned revenue, prepaid insurance, office supplies, prepaid rent, etc. Non-cash:
These adjusting entries record non-cash items such as depreciation expense, allowance for doubtful
debts etc.
Accrual basis: An accounting method that measures the performance and position of a company by
recognizing economic events regardless of when cash transactions occur. The general idea is that
economic events are recognized by matching revenues to expenses (the matching principle) at the
time in which the transaction occurs rather than when payment is made (or received). This method
allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows
to give a more accurate picture of a company's current financial condition.
For example, a company delivers a product to a customer who will pay for it 30 days later in the next
fiscal year, which starts a week after the delivery. The company recognizes the proceeds as a
revenue in its current income statement still for the fiscal year of the delivery, even though it will get
paid in cash during the following accounting period.[2] The proceeds are also an accrued income
(asset) on the balance sheet for the delivery fiscal year, but not for the next fiscal year when cash is
received.
Banking transaction; Activity affecting a bank account and performed by the account holder or at
his or her request. It includes commercial banking products and services for corporate clients and
financial institutions, including domestic and cross border payments, professional risk mitigation for
international trade and the provision of trust, agency, depository, custody and related services.

Bank reconciliation Statement A Bank reconciliation is a process that explains the difference
between the bank balance shown in an organization's bank statement, as supplied by the bank, and
the corresponding amount shown in the organization's own accounting records at a particular point in
time. Such differences may occur, for example, because a cheque or a list of cheques issued by the
organization has not been presented to the bank, a banking transaction, such as a credit received, or
a charge made by the bank, has not yet been recorded in the organization's books, or either the
bank or the organisation itself has made an error.Bank reconciliation statement is a form that allows
individuals to compare their personal bank account records to the bank's records of the individual's
account balance in order to uncover any possible discrepancies. Bank reconciliation is Analysis and
adjustment of differences between the cash balance shown on a bank statement, and the amount
shown in the account holder's records. This matching process involves making allowances for checks
issued but not yet presented, and for checks deposited but not yet cleared or credited. And, if
discrepancies persist, finding the cause and bringing the records into agreement.
Break-even point Break-even point (BEP) is the point at which cost or expenses and revenue are
equal: there is no net loss or gain, and one has "broken even". A profit or a loss has not been made,
although opportunity costs have been "paid", and capital has received the risk-adjusted, expected
return. In short, all costs that needs to be paid are paid by the firm but the profit is equal to 0. For
example, if a business sells fewer than 200 tables each month, it will make a loss, if it sells more, it
will be a profit. With this information, the business managers will then need to see if they expect to
be able to make and sell 200 tables per month.If they think they cannot sell that many, to ensure
viability they could:Try to reduce the fixed costs (by renegotiating rent for example, or keeping
better control of telephone bills or other costs), Try to reduce variable costs (the price it pays for the
tables by finding a new supplier), Increase the selling price of their tables. Any of these would reduce
the break even point. In other words, the business would not need to sell so many tables to make
sure it could pay its fixed costs.

The break-even point is one of the simplest yet least used analytical tools in management. It helps
to provide a dynamic view of the relationships between sales, costs and profits. A better
understanding of break-even, for example, is expressing break-even sales as a percentage of actual
salescan give managers a chance to understand when to expect to break even (by linking the
percent to when in the week/month this percent of sales might occur). The break-even point is a
special case of Target Income Sales, where Target Income is 0 (breaking even). This is very
important for financial analysis. Limitation: Break-even analysis is only a supply side (i.e. costs only)
analysis, as it tells you nothing about what sales are actually likely to be for the product at these
various prices, It assumes that fixed costs (FC) are constant. Although this is true in the short run,
an increase in the scale of production is likely to cause fixed costs to rise, It assumes average
variable costs are constant per unit of output, at least in the range of likely quantities of sales. (i.e.
linearity), It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e.,
there is no change in the quantity of goods held in inventory at the beginning of the period and the
quantity of goods held in inventory at the end of the period)
Break-even chart: used in breakeven analysis to estimate when the total sales revenue will equal
total costs; the point where loss will end and profit will begin to accumulate. Usually, the number of
units are plotted on horizontal ('X') axis and total sales dollars on vertical ('Y') axis. Point where the
two lines or curves intersect is called the breakeven-point.
According to Hermanson, Edwards & Salmonson: Break even chart is a graphic presentation of the
relationship between cost volume and profits which also shown the breakeven point.
Breakeven point analysis Breakeven point analysis is that it explains the relationship between
cost, production, volume and returns. It can be extended to show how changes in fixed cost, variable
cost, commodity prices, and revenues will effect profit levels and break even points. Break even
analysis is most useful when used with partial budgeting, capital budgeting techniques. The major
benefit to use break even analysis is that it indicates the lowest amount of business activity
necessary to prevent losses. The limitations of Break Even Analysis are It is best suited to the
analysis of one product at a time. It may be difficult to classify a cost as all variable or all fixed; and
there may be a tendency to continue to use a break even analysis after the cost and income
functions have changed.
Basel Accords (see alternative spellings below) refer to the banking supervision Accords
(recommendations on banking regulations)Basel I, Basel II and Basel IIIissued by the Basel
Committee on Banking Supervision (BCBS). They are called the Basel Accords as the BCBS maintains
its secretariat at the Bank for International Settlements in Basel, Switzerland and the committee
normally meets there. Formerly, the Basel Committee consisted of representatives from central
banks and regulatory authorities of the Group of Ten countries plus Luxembourg and Spain. Since
2009, all of the other G-20 major economies are represented, as well as some other major banking
locales such as Hong Kong and Singapore. (See the Committee article for a full list of members.)The
committee does not have the authority to enforce recommendations, although most member
countries as well as some other countries tend to implement the Committee's policies. This means
that recommendations are enforced through national (or EU-wide) laws and regulations, rather than
as a result of the committee's recommendations - thus some time may pass between
recommendations and implementation as law at the national level.
Cash Basis: A major accounting method that recognizes revenues and expenses at the time physical
cash is actually received or paid out. This contrasts to the other major accounting method, accrual
accounting, which requires income to be recognized in a company's books at the time the revenue is
earned (but not necessarily received) and records expenses when liabilities are incurred (but not
necessarily paid for). When transactions are recorded on a cash basis, they affect a company's books
only once a completed exchange of value has occurred; therefore, cash basis accounting is less
accurate than accrual accounting in the short term.
For example, let's say a construction company secures a major contract in a given year, but will only
be paid for its efforts upon completion of the project. Using cash basis accounting, the company will
only be able to recognize the revenue from its project at its completion, while it will record the
project's expenses as they are being paid out. If the project's time span is greater than one year, the
company's income statements will be misleading: the company will incur large losses one year and
then great gains the next.
Cash basis accounting is simpler and cheaper to perform than accrual accounting, but it can make
obtaining financing more difficult due to its inaccuracy.
Contribution Margin: A cost accounting concept that allows a company to determine the
profitability of individual products. The phrase "contribution margin" can also refer to a per unit
measure of a product's gross operating margin, calculated simply as the product's price minus its
total variable costs. According to Garrison and Noreen: Contribution Margin is the amount remaining
from sales revenues after all variable expenses have been deducted. According to Hermanson,
Edwards & Salmonson: Contribution margin is the amount by which the revenue secared from the
sale of products exceeds the Variable costs of those products Contribution= Sales- Variable cost or
Contribution= Sales*P/V ratio Contribution margin ratio is the percentage of contribution over total
revenue which can be calculated from the unit contribution over unit price or total contribution over
total revenue. Contribution margin analysis is a measure of operating leverage; it measures how
growth in sales translates to growth in profits. The contribution margin analysis is also responsible
when the tax authority performs tax investigation, by identifying target interviewee who has unusual
high contribution margin ratio then other companies in the same industry.Consider a situation in
which a business manager determines that a particular product has a 35% contribution margin,
which is below that of other products in the company's product line. This figure can then be used to
determine whether variable costs for that product can be reduced, or if the price of the end product
could be increased.
CVP analysis and its limitation?
Costvolumeprofit (CVP), in managerial economics, is a form of cost accounting. It is a simplified
model, useful for elementary instruction and for short-run decisions.CVP analysis expands the use of
information provided by breakeven analysis. A critical part of CVP analysis is the point where total
revenues equal total costs (both fixed and variable costs). At this break-even point, a company will
experience no income or loss. This break-even point can be an initial examination that precedes
more detailed CVP analysis.CVP analysis employs the same basic assumptions as in breakeven
analysis. The assumptions underlying CVP analysis are: The behavior of both costs and revenues is
linear throughout the relevant range of activity. (This assumption precludes the concept of volume
discounts on either purchased materials or sales.), Costs can be classified accurately as either fixed
or variable., Changes in activity are the only factors that affect costs, All units produced are sold
(there is no ending finished goods inventory), When a company sells more than one type of product,
the sales mix (the ratio of each product to total sales) will remain constant, The components of CVP
analysis are: Level or volume of activity, Unit selling prices, Variable cost per unit, Total fixed costs,
Sales mixCVP is a short run, marginal analysis: it assumes that unit variable costs and unit revenues
are constant, which is appropriate for small deviations from current production and sales, and
assumes a neat division between fixed costs and variable costs, though in the long run all costs are
variable. For longer-term analysis that considers the entire life-cycle of a product, one therefore
often prefers activity-based costing or throughput accounting.
Current Assets vs Long Term Assets Current Assets: A balance sheet account that represents the
value of all assets that are reasonably expected to be converted into cash within one year in the
normal course of business. Current assets include cash, accounts receivable, inventory, marketable
securities, prepaid expenses and other liquid assets that can be readily converted to cash. In
personal finance, current assets are all assets that a person can readily convert to cash to pay
outstanding debts and cover liabilities without having to sell fixed assets.
Floating assets are not permanent and . these are ever changing assets that change depending on
the business eg cash , accounts receivable , notes receivable, finished products , goods in in the
process of manufacturing, raw material, supplies etc. Cash or other types of assets that can be easily
converted to cash (usually within 20 days) are considered liquid assets. This section discusses types
and availability of liquid assets. Examples of Liquid Assets: Checking accounts, Certificates of Deposit
(CDs) & Guardianship accounts Current Account: A current account is a sum of three things - net
factor income, balance of trade and net transfer payments. Net factor income is nothing but the
income which comes from the sources like interest and dividends. On the other hand, the balance of
trade denotes the difference in the exports of a country and its imports. Net transfer of payments
could be related to the foreign aid which is received by many nations. A current account, in simple
words is a sign of the net income of a nation. A surplus shows that the country's net foreign assets
have risen over a fixed period while a deficit is an indicator of decreased net foreign assets of the
country. Current accounts are known as the balance of international dealings of currently produced
goods and services. Its deficits are possible in times when exports are less than the imports. At this
time, these deficits can be balanced with the surplus on capital accounts. Merchandise trade, service
such as tourism, labor, transportation, engineering, management consulting, software services,
income receipts and unilateral transfers which are one way transfer of assets are all included in
current accounts.
Cooking the books: A buzzword describing fraudulent activities performed by corporations in order
to falsify their financial statements. Typically cooking the books involves augmenting financial data to
yield previously non-existent earnings. Examples of techniques used t o cook the books involve
accelerating revenues, delaying expenses, manipulating pension plans and implementing synthetic
leases. In order to rally investor confidence, the Sarbanes-Oxley act of 2002 was created .this act of
congress crated policies to protect investors against future incidents of corporate fraud. Cooking the
books" creates the appearance of earnings that really didn't exist. A company is guilty of cooking
the books when it knowingly includes incorrect information on its financial statements --
manipulating expenses and earnings to improve their earnings per share of stock (EPS).
Capital Account: Capital account has been defined by economists as the net balance of the
international investment transactions. With such an account, we can understand the flow of money in
and out of the nation. Any surplus is an indicator of money coming inside a country while deficit
reveals that money is going out of the country. Calculation of capital account can be done by the
summation of foreign direct investment (FDI), portfolio investments, reserve account and other
investments. While FDI is the long-term capital investment with a lot of money, portfolio investments
are the acquiring of shares and bonds. The reserve account is a source of capital flows and is
managed by central bank of the nation and the other investments basically include capital flows in
banks and capital flows advanced as loans.
Cash Book: A financial journal that contains all cash receipts and payments, including bank deposits
and withdrawals. Entries in the cash book are then posted into the general ledger. The cash book is
periodically reconciled with the bank statements as an internal method of auditing. Larger firms
usually divide the cash book into two parts. The first part is the cash disbursement journal that
records all cash payments, such as accounts payable and operating expenses. The second part is the
cash receipts journal, which records all cash receipts, such as accounts receivable and cash sales.
According to John Routley: The Book containing the record of all cash passing into and out of a
business is called the cash book
Cash Discount: An incentive that a seller offers to a buyer in return for paying a bill owed before
the scheduled due date. The seller will usually reduce the amount owed by the buyer by a small
percentage or a set dollar amount. If used properly, cash discounts improve the days-sales-
outstanding aspect of a business's cash conversion cycle.
For example, a typical cash discount would be if the seller offered a 2% discount on an invoice due in
30 days if the buyer were to pay within the first 10 days of receiving the invoice.
Providing a small cash discount would be beneficial for the seller as it would allow him to have access
to the cash sooner. The sooner a seller receives the cash, the earlier he can put the money back into
the business to buy more supplies and/or grow the company further.According to pyle & Larson:
Cash discount is a deduction from the invoice price of goods allowed of payment is made within
specified period of time
Cash flow statement In financial accounting, a cash flow statement, also known as statement of
cash flows, is a financial statement that shows how changes in balance sheet accounts and income
affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing
activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the
business. The statement captures both the current operating results and the accompanying changes
in the balance sheet.[1] As an analytical tool, the statement of cash flows is useful in determining the
short-term viability of a company, particularly its ability to pay bills.
International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with
cash flow statements. According to Khan and Jain: Cash Flow Statement are statements of changes
in financial position prepared on the basis of funds defined as cash or cash equivalents
Conservatism concept The conservatism principle is the general concept of recognizing expenses
and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize
revenues and assets when they are assured of being received. Thus, when given a choice between
several outcomes where the probabilities of occurrence are equally likely, you should recognize that
transaction resulting in the lower amount of profit, or at least the deferral of a profit. Similarly, if a
choice of outcomes with similar probabilities of occurrence will impact the value of an asset,
recognize the transaction resulting in a lower recorded asset valuation.
Closing Entries Vs Adjustment Entries: Adjusting entries are made at the end of the accounting
period (but prior to preparing the financial statements) in order for a companys accounting records
and financial statements to be up-to-date on the accrual basis of accounting. For example, each day
the company incurs wages expense but the payroll involving workers wages for the last days of the
month wont be entered in the accounting records until after the accounting period ends. Similarly,
the company uses electricity each day but receives only one bill per month, perhaps on the 20th day
of the month. The electricity expense for the last 10-15 days of the month must get into the
accounting records if the financial statements are to show all of the expenses and the amounts owed
for the current accounting period. Other adjusting entries involve amounts that the company paid
prior to amounts becoming expenses. For examples, the company probably paid its insurance
premiums for a six month period prior to the start of the six month period. The company may have
deferred the expense by recording the amount in the asset account Prepaid Insurance. Closing
entries are dated as of the last day of the accounting period, but they are entered into the accounts
after the financial statements are prepared. For the most part, closing entries involve the income
statement accounts. The closing entries set the balances of all of the revenue accounts and the
expense accounts to zero. This means that the revenue and expense accounts will start the new year
with nothing in the accountsallowing the company to easily report the new year revenues and
expenses. The net amount of all of the balances from the revenue and expense accounts at the end
of the year will end up in retained earnings (for corporations) or owners equity (for sole
proprietorships). Thanks to accounting software, the closing entries are quite effortless.
Contingent liability is a potential liability. This means that the contingent liability might become an
actual liability and a loss, or it might not. It depends on something in the future. example of a
contingent liability is a product warranty. If a company promised to replace a defective unit at no
cost to the customer within one year of purchase, the company will have an actual liability only if
units are defective. If the company is certain that no units will be returned as defective, the company
will have no liability and no warranty expense. If a contingent liability is possible (but not probable),
no journal entry is needed. However, the accountant must disclose the contingent liability and loss in
the notes to the financial statements.If a contingent liability is remote, then the accountant will not
report the liability and loss and will not disclose it.
Cash Fore castEstimate of the timing and amounts of cash inflows and outflows over a specific
period (usually one year). A cash flow forecast shows if a firm needs to borrow, how much, when,
and how it will repay the loan. Also called cash flow budget or cash flow projection. The cash flow
forecast predicts the net cash flows of the business over a future period. The forecast estimates what
the cash inflows into the bank account and outflows out of the bank account will be. The result of
the cash flow forecast is an estimate of the bank balance at the end of each period covered (normally
this is for each month).A business uses a cash flow forecast to: Identify potential shortfalls in cash
balances for example, if the forecast shows a negative cash balance then the business needs to
ensure it has a sufficient bank overdraft facility See whether the trading performance of the business
(revenues, costs and profits) turns into cash. Analyse whether the business is achieving the financial
objectives set out in the business plan (which will almost certainly include some kind of cash flow
budget)
Comparative Financial Statement analysis: provides information to assess the direction of
change in the business. Financial statements are presented as on a particular date for a particular
period. The financial statement Balance Sheet indicates the financial position as at the end of an
accounting period and the financial statement Income Statement shows the operating and non-
operating results for a period. But financial managers and top management are also interested in
knowing whether the business is moving in a favorable or an unfavorable direction. For this purpose,
figures of current year have to be compared with those of the previous years. In analyzing this way,
comparative financial statements are prepared. Comparative Financial Statement Analysis is also
called as Horizontal analysis. The Comparative Financial Statement provides information about two
or more years' figures as well as any increase or decrease from the previous year's figure and it's
percentage of increase or decrease. This kind of analysis helps in identifying the major improvements
and weaknesses. For example, if net income of a particular year has decreased from its previous
year, despite an increase in sales during the year, is a matter of serious concern. Comparative
financial statement analysis in such situations helps to find out where costs have increased which has
resulted in lower net income than the previous year.
Chartered Institute of Management Accountants (CIMA) is a United Kingdom-based
professional body offering training and qualification in management accountancy and related
subjects, focused on accounting for business; together with ongoing support for members. CIMA is
one of a number of professional associations for accountants in Ireland and the UK. Its particular
emphasis is on developing the management accounting profession within the UK and worldwide.
CIMA is the largest management accounting body in the world, with more than 203,000 members
and students in 173 countries.[1] CIMA also is a member of the International Federation of
Accountants. CIMA professionals integrate a complex body of investment knowledge, ethically
contributing to prudent investment decisions by providing objective advice and guidance to individual
investors and institutional investors. The CIMA certification program is the only credential designed
specifically for financial professionals who want to attain a level of competency as an advanced
investment consultant.
CAMELS Rating System: An international bank-rating system where bank supervisory authorities
rate institutions according to six factors. The six factors are represented by the acronym
"CAMELS."The six factors examined are as follows:
C- Capital adequacy
A - Asset quality
M - Management quality
E - Earnings
L - Liquidity
S - Sensitivity to Market Risk
Bank supervisory authorities assign each bank a score on a scale of one (best) to five (worst) for
each factor. If a bank has an average score less than two it is considered to be a high-quality
institution, while banks with scores greater than three are considered to be less-than-satisfactory
establishments. The system helps the supervisory authority identify banks that are in need of
attention.
Double Column cash book and triple column cash books
A three column cash book or treble column cash book is one in which there are three columns on
each side - debit and credit side. One is used to record cash transactions, the second is used to
record bank transactions and third is used to record discount received and paid. When a trader keeps
a bank account it becomes necessary to record the amounts deposited into bank and withdrawals
from it. Fir this purpose one additional column is added on each side of the cash book. One of the
main advantages of a three column cash book is that it is very helpful to businessmen, since it
reveals the cash and bank deposits at a glance
Format of the Three Column Cash Book:
Debit Side Credit Side
Dis- Dis-
Date Particulars V.N. L.F. Cash Bank Date Particulars V.N. L.F. Cash Bank
count count

Double Column Cash Book has two columns. One is for recording Cash transactions and the other is
for recording Banking transactions. On the Left hand side we enter the receipts of cash in cash
column and the receipts of cheques and deposits in the bank in the bank column. On the Right hand
side we enter the payments of cash in the cash column and the withdrawals from bank and
payments by cheques in the bank column.
The Format of Double Column Cash Book is given as under.........
DOUBLE COLUMN CASH BOOK
Receipts Payments
Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank

Total Total
Difference between Funds Flow Statement and Cash Flow Statement
Basis of Difference Funds Flow Statement Cash Flow Statement
1. Basis of Analysis Funds flow statement is based Cash flow statement is based on
on broader concept i.e. working narrow concept i.e. cash, which is
capital. only one of the elements of working
capital.
2. Source Funds flow statement tells about Cash flow statement stars with the
the various sources from where opening balance of cash and reaches
the funds generated with various to the closing balance of cash by
uses to which they are put. proceeding through sources and
uses.
3. Usage Funds flow statement is more Cash flow statement is useful in
useful in assessing the long- understanding the short-term
range financial strategy. phenomena affecting the liquidity of
the business.
4. Schedule of In funds flow statement changes In cash flow statement changes in
Changes in in current assets and current current assets and current liabilities
Working Capital liabilities are shown through the are shown in the cash flow
schedule of changes in working statement itself.
capital.
5. End Result Funds flow statement shows the Cash flow statement shows the
causes of changes in net causes the changes in cash.
working capital.
6. Principal of Funds flow statement is in In cash flow statement data
Accounting alignment with the accrual basis obtained on accrual basis are
of accounting. converted into cash basis.
Difference between balance sheet and statement of affairs: The following are the 8 important
points of differences between Balance Sheet and Statement of Affairs: 1. A Balance Sheet shows
assets at book values, while a Statement of Affairs shows assets at book values, as well as realizable
value. 2. A Balance Sheet shows fictitious assets such as goodwill, prepaid expenses while a
Statement of Affairs does not show such items. 3. In a Statement of Affairs, creditors arc classified
as unsecured, fully secured, partly secured and preferential creditors. No such classification is usually
found in a Balance Sheet. 4. A Balance Sheet gives information about capital, profit or loss, drawings
and interest on capital whereas a Statement of Affairs excludes all such items. 5. A Statement of
Affairs shows the amount (i.e., deficiency) which the insolvent debtor is not able to pay to his
creditors while a Balance Sheet does not show such a figure. 6. A Statement of Affairs is prepared on
the date on which order of adjudication is passed against the debtor whereas a Balance Sheet is
prepared usually at the end of each accounting period. 7. A Balance Sheet of an individual or a
partnership firm is not prepared according to any act whereas a Statement of Affairs is prepared
according to the rules given in the Insolvency Acts. 8. A Balance Sheet shows assets and liabilities of
a business as a going concern whereas a Statement of Affairs is prepared on the liquidation of the
business of an insolvent and shows assets at realizable values and liabilities at their payable values.
Double-entry bookkeeping system is a set of rules for recording financial information in a
financial accounting system in which every transaction or event changes at least two different
nominal ledger accounts. The name derives from the fact that financial information used to be
recorded using pen and ink in paper books hence "bookkeeping" (whereas now it is recorded
mainly in computer systems) and that these books were called journals and ledgers (hence nominal
ledger, etc.) and that each transaction was entered twice (hence "double-entry"), with one side of
the transaction being called a debit and the other a credit. Double-entry bookkeeping system is an
accounting technique which records each transaction as both a credit and a debit. Credit entries
represent the sources of financing, and the debit entries represent the uses of that financing. Since
each credit has one or more corresponding debits (and vice versa), the system of double entry
bookkeeping always leads to a set of balanced ledger credit and debit accounts. Selected entries
from these ledger balances are then used to prepare the income statement.
Deferred Revenue Expenditure: While revenue expenditure is a simple concept, deferred revenue
expenditure is slightly more complicated. In this case, the value received from the expenditure is not
immediate. Buying a training program may add skills to office labor forces over just a few days, but
not all effects occur so quickly. Sometimes the benefit is delayed over months or even years. In this
case, the business creates a deferred revenue expenditure account to match up the expense with the
value received, similar to depreciation accounts but for a different set of activities. Examples A
common example for deferred revenue expenditures is in marketing. Advertising, according to many
theories, has a delayed effect. This means that the business can spend money on an advertising
campaign, but not realize increased sales until several months down the line when customers absorb
the full impact of the ads. Some theories disagree that advertising is so delayed, but if the business
accounts for it then it will create a deferred revenue expenditure account in order to match up the
delayed value with the amortized costs of the advertising.
Debit Note Vs Credit Note: A transaction that reduces Amounts Receivable from a customer is a
credit memo. For e.g.. The customer could return damaged goods. A debit memo is a transaction
that reduces Amounts Payable to a vendor because; you send damaged goods back to your vendor.
Credit memo request is a sales document used in complaints processing to request a credit memo for
a customer. If the price calculated for the customer is too high, for example, because the wrong
scale prices were used or a discount was forgotten, you can create a credit memo request. The credit
memo request is blocked for further processing so that it can be checked. If the request is approved,
you can remove the block. The system uses the credit memo request to create a credit memo. Debit
memo request is a sales document used in complaints processing to request a debit memo for a
customer. If the prices calculated for the customer were too low, for example, calculated with the
wrong scaled prices, you can create a debit memo request. The debit memo request can be blocked
so that it can be checked. When it has been approved, you can remove the block. It is like a
standard order. The system uses the debit memo request to create a debit memo.
Difference between Depreciation, Depletion & Amortization: Depreciation: Depreciation is
the systematic process of allocating the depreciable amount of an asset over its useful life.
Depreciable amount is the cost of an asset, less its residual value. Depreciation must be charged
from the date the asset is available for use in the production process and able to give support to
production facility. Depreciation accounting is mainly concerned with a rational and systematic
distribution of cost over its useful life. Depreciation is nothing more than a systematic write-off of the
original cost of the fixed assets. Plant and machineries, building and furniture, and vehicle are
classified under depreciation.Depletion: The process of amortizing the cost of natural resources in
accounting periods benefited is called depletion. The term depletion is used not only the exhaustion
of natural resource but also the proportional allocation of the cost of natural resources to the units
extracted from the ground and in case of timberland. The objective is the same as that for
depreciation and to allocate the cost in some systematic manner to the useful years of the asset life.
Oil and gas mine, timber land and mineral reserve are classified under depletion. Amortization: The
accounting process connected with intangible assets is essentially the same process as the
depreciation of tangible fixed asset. The systematic allocation of the costs of intangible assets over
the term of its expected useful life is called amortization. Because the salvage values are ordinarily
not involved with amortization system. Amortization usually includes the determining the assets
cost, estimating the period over which it provides benefits the firm and allocating the cost in equal
amount to each accounting period involved. The usual journal entry for amortization consist the
debit for amortization expense account and credit intangible asset account. Patents, copyrights,
possession of software, goodwill, brand names, customer lists are classified under the amortization
Ethics, also known as moral philosophy, is a branch of philosophy that involves systematizing,
defending and recommending concepts of right and wrong conduct.[1] The term comes from the
Greek word ethos, which means "character". Ethics is a complement to Aesthetics in the philosophy
field of Axiology. In philosophy, ethics studies the moral behavior in humans and how one should
act. Ethics may be divided into four major areas of study: [1]Meta-ethics, about the theoretical
meaning and reference of moral propositions and how their truth values (if any) may be determined;
Normative ethics, about the practical means of determining a moral course of action; Applied ethics,
about how moral outcomes can be achieved in specific situations; Descriptive ethics, also known as
comparative ethics, is the study of people's beliefs about morality;Ethics seeks to resolve questions
dealing with human moralityconcepts such as good and evil, right and wrong, virtue and vice,
justice and crime.
Financial Statements of a Partnership Partnerships are a legal form of business organization
where two or more partners come together to form a business. Partnership financial statements
differ from financial statements of corporations or sole proprietorships--the other main forms of
business organization. Much sole proprietorship is organized as Limited Liability Companies, but for
accounting and tax purposes they are proprietorships. In modern business two statements is known
as Financial Statement: Income Statement, Balance Sheet
Financial statement analysis (or financial analysis) the process of understanding the risk and
profitability of a firm (business, sub-business or project) through analysis of reported financial
information, by using different accounting tools and techniques. Financial statement analysis consists
of 1) reformulating reported financial statements, 2) analysis and adjustments of measurement
errors, and 3) financial ratio analysis on the basis of reformulated and adjusted financial statements.
The first two steps are often dropped in practice, meaning that financial ratios are just calculated on
the basis of the reported numbers, perhaps with some adjustments. Financial statement analysis is
the foundation for evaluating and pricing credit risk and for doing fundamental company valuation.
Forensic accounting, forensic accountancy or financial forensics is the specialty practice area
of accountancy that describes engagements that result from actual or anticipated disputes or
litigation. "Forensic" means "suitable for use in a court of law", and it is to that standard and
potential outcome that forensic accountants generally have to work. Forensic accountants, also
referred to as forensic auditors or investigative auditors, often have to give expert evidence at the
eventual trial.[1] All of the larger accounting firms, as well as many medium-sized and boutique firms,
as well as various Police and Government agencies have specialist forensic accounting departments.
Within these groups, there may be further sub-specializations: some forensic accountants may, for
example, just specialize in insurance claims, personal injury claims, fraud, construction,[2] or royalty
audits.[3]Financial forensic engagements may fall into several categories. For examples: Economic
damages calculations, whether suffered through tort or breach of contract; Post-acquisition disputes
such as earnouts or breaches of warranties; Bankruptcy, insolvency, and reorganization; Securities
fraud; Business valuation;
FOB Shipping Point Vs FOB Destination: The point of FOB shipping point terms is to transfer the
title to the goods to the buyer at the shipping point. Goods in transit should therefore be reported as
a purchase and as inventory by the buyer, and as a sale and an increase in accounts receivable by
the seller. When a sale is made, accountants must record revenue for the merchandiser and
manufacturer. The term, FOB Shipping Point, indicates that the sale occurred at the shipping point
at the sellers shipping dock.

FOB Destination Terms indicating that the seller will incur the delivery expense to get the goods to
the destination. With terms of FOB destination the title to the goods usually passes from the buyer to
the seller at the destination. This means that goods in transit should be reported as inventory by the
seller, since technically the sale does not occur until the goods reach the destination.
Goodwill: An intangible asset which provides a competitive advantage, such as a strong brand,
reputation, or high employee morale. In an acquisition, goodwill appears on the balance sheet of the
acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired
company. Goodwill is an accounting concept meaning the value of an asset owned that is intangible
but has a quantifiable "prudent value" in a business. For example, a reputation the firm enjoyed with
its clients.
Generally accepted accounting principles (GAAP): Generally accepted accounting principles
(GAAP) refer to the standard framework of guidelines for financial accounting used in any given
jurisdiction; generally known as accounting standards or standard accounting practice. These include
the standards, conventions, and rules that accountants follow in recording and summarizing and in
the preparation of financial statements. Authoritative rules, practices, and conventions meant to
provide both broad guidelines and detailed procedures for preparing financial statements and
handling specific accounting situations. Generally accepted accounting principles (GAAP) provide
objective standards for judging and comparing financial data and its presentation, and limit the
directors' freedom in showing an unrealistic picture through creative accounting. An auditor must
certify that the provisions of GAAP have been followed in reporting an organization's financial data in
order it to be accepted by investors, lenders, and tax authorities. Most developed countries
(Canada,India, Japan, UK, US, etc.) have their own GAAP which may differ from those of others in
minor or major details. See also accounting.
Horizontal Analysis Vs Vertical Analysis The horizontal analysis compares specific items over
a number of accounting periods. For example, accounts payable may be compared over a period of
months within a fiscal year, or revenue may be compared over a period of several years. These
comparisons are performed in one of two different ways. The vertical analysis compares each
separate figure to one specific figure in the financial statement. The comparison is reported as a
percentage. This method compares several items to one certain item in the same accounting period.
Users often expand upon vertical analysis by comparing the analyses of several periods to one
another. This can reveal trends that may be helpful in decision making.
International accounting standard An older set of standards stating how particular types of
transactions and other events should be reflected in financial statements. In the past, international
accounting standards (IAS) were issued by the Board of the International Accounting Standards
Committee (IASC). Since 2001, the new set of standards has been known as the international
financial reporting standards (IFRS) and has been issued by the International Accounting Standards
Board (IASB). The International Accounting Standards Board (IASB) is the independent, accounting
standard-setting body of the IFRS Foundation.[1]The IASB was founded on April 1, 2001 as the
successor to the International Accounting Standards Committee (IASC). It is responsible for
developing International Financial Reporting Standards (the new name for International Accounting
Standards issued after 2001), and promoting the use and application of these standards.
Inventory: The raw materials, work-in-process goods and completely finished goods that are
considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory
represents one of the most important assets that most businesses possess, because the turnover of
inventory represents one of the primary sources of revenue generation and subsequent earnings for
the company's shareholders/owners. Possessing a high amount of inventory for long periods of time
is not usually good for a business because of inventory storage, obsolescence and spoilage costs.
However, possessing too little inventory isn't good either, because the business runs the risk of
losing out on potential sales and potential market share as well.
Internal audit Internal auditing is an independent, objective assurance and consulting activity
designed to add value and improve an organization's operations. It helps an organization accomplish
its objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance processes.[1] Internal auditing is a
catalyst for improving an organization's governance, risk management and management controls by
providing insight and recommendations based on analyses and assessments of data and business
processes. With commitment to integrity and accountability, internal auditing provides value to
governing bodies and senior management as an objective source of independent advice.
Professionals called internal auditors are employed by organizations to perform the internal auditing
activity.The role of internal audit is to provide independent assurance that an organisation's risk
management, governance and internal control processes are operating effectively.
Intangible Assets: An asset that is not physical in nature. Corporate intellectual property (items
such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition
are all common intangible assets in today's marketplace. An intangible asset can be classified as
either indefinite or definite depending on the specifics of that asset. A company brand name is
considered to be an indefinite asset, as it stays with the company as long as the company continues
operations. However, if a company enters a legal agreement to operate under another company's
patent, with no plans of extending the agreement, it would have a limited life and would be classified
as a definite asset. While intangible assets don't have the obvious physical value of a factory or
equipment, they can prove very valuable for a firm and can be critical to its long-term success or
failure. For example, a company such as Coca-Cola wouldnt be nearly as successful was it not for
the high value obtained through its brand-name recognition. Although brand recognition is not a
physical asset you can see or touch, its positive effects on bottom-line profits can prove extremely
valuable to firms such as Coca-Cola, whose brand strength drives global sales year after year
Imprest system of cash book: The Imprest system is a form of financial accounting system. The
most common imprest system is the petty cash system. The base characteristic of an imprest system
is that a fixed amount is reserved, which after a certain period of time or when circumstances
require, because money was spent, it will be replenished. This replenishment will come from another
account source e.g. petty cash will be replenished by cashing a cheque drawn on a bank account.
The essential features of an imprest system are: A fixed amount of cash is allocated to a petty cash
fund, which is stated in a separate account in the general ledger, All cash distributions from the petty
cash fund are documented with receipts, Petty cash disbursement receipts are used as the basis for
periodic replenishments of the petty cash fund.
Irrelevant Cost: A cost incurred by a company which is unaffected by management's decisions.
Such costs can be either positive or negative and may even turn out to be a relevant cost in certain
situations. For example, if a company bought an off-the-shelf software program but it did not work
as intended and cannot be returned, the cost incurred (sunk cost) becomes irrelevant regardless of
management's decision. A managerial accounting term that represents a cost, either positive or
negative, that does not relate to a situation requiring management's decision.
 IFRS- Define? International Financial Reporting Standards (IFRS) are designed as a common global
language for business affairs so that company accounts are understandable and comparable across
international boundaries. They are a consequence of growing international shareholding and trade
and are particularly important for companies that have dealings in several countries. They are
progressively replacing the many different national accounting standards. The rules to be followed by
accountants to maintain books of accounts which is comparable, understandable, reliable and
relevant as per the users internal or external. In Bangladesh some IAS/IFRS is taken by the Institute
of Chartered Accountants of Bangladesh-ICAB is known as Bangladesh Accounting Standard-BAS or
Bangladesh Financial Reporting Standard-BFRS. IFRS authorize three basic accounting models: I.
Current Cost Accounting, under Physical Capital Maintenance at all levels of inflation and deflation
under the Historical Cost paradigm as well as the Capital Maintenance in Units of Constant
Purchasing Power paradigm. II. Financial Capital Maintenance in Nominal Monetary Units, i.e.,
globally implemented Historical cost accounting during low inflation and deflation only under the
traditional Historical Cost paradigm. III. Financial Capital Maintenance in Units of Constant
Purchasing Power, CMUCPP in terms of a Daily Consumer Price Index or daily rate at all levels of
inflation and deflation under the Capital Maintenance in Units of Constant Purchasing Power
paradigm.
Journal: A journal details all the financial transactions of a business and which accounts these
transactions affect.All business transaction are initially recorded in a journal using the double-entry
method or single-entry method of bookkeeping. Typically, journal entries are entered in chronological
order and debits are entered before credits. In accounting, a "journal" refers to a financial record
kept in the form of a book, spreadsheet, or accounting software that contains all the recorded
financial transaction information about a business. An accounting journal is created by entering
information from receipts, sales tickets, cash register tapes, invoices, and other data sources that
show financial transactions. Business transactions should be recorded so that they can be presented
in the journal in chronological order.
LIFO Vs FIFO FIFO and LIFO accounting methods are used for determining the value of unsold
inventory, the cost of goods sold and other transactions like stock repurchases that need to be
reported at the end of the accounting period. FIFO stands for First In, First Out, which means the
goods that are unsold are the ones that were most recently added to the inventory. Conversely, LIFO
is Last In, First Out, which means goods most recently added to the inventory are sold first so the
unsold goods are ones that were added to the inventory the earliest. LIFO accounting is not
permitted by the IFRS standards so it is less popular. It does, however, allow the inventory valuation
to be lower in inflationary times. Comparison chart
FIFO LIFO

Stands for: First in, first out Last in, first out

Unsold Unsold inventory is comprised of goods Unsold inventory is comprised of the

inventory: acquired most recently. earliest acquired goods.

Restrictions: There are no GAAP or IFRS restrictions for IFRS does not allow using LIFO for
using FIFO; both allow this accounting accounting.
method to be used.

Effect of If costs are increasing, the items acquired
Inflation: first were cheaper. This decreases the cost
of goods sold (COGS) under FIFO and
increases profit. The income tax is larger.
Value of unsold inventory is also higher.
If costs are increasing, then recently
acquired items are more expensive.
This increases the cost of goods sold
(COGS) under LIFO and decreases
the net profit. The income tax is
smaller. Value of unsold inventory is
lower.

Effect of Converse to the inflation scenario, Using LIFO for a deflationary period
Deflation: accounting profit (and therefore tax) is results in both accounting profit and
lower using FIFO in a deflationary period. value of unsold inventory being
Value of unsold inventory, is lower. higher.
 FIFO LIFO

Record Since oldest items are sold first, the Since newest items are sold first, the
keeping: number of records to be maintained oldest items may remain in the
decreases. inventory for many years. This
increases the number of records to
be maintained.

Fluctuations: Only the newest items remain in the Goods from number of years ago
inventory and the cost is more recent. may remain in the inventory. Selling
Hence, there is no unusual increase or them may result in reporting unusual
decrease in cost of goods sold. increase or decrease in cost of goods
Ledger: A ledger contains summarized financial information that is classified by assignment to a
specific account number using a Chart of Accounts. A ledger can be a physical book or also refer to
software or spreadsheets where the financial information is recorded.A General Ledger contains a
summary of all the information recorded in subsidiary ledgers, which are ledgers that break down
and show more information according to classifications. Financial information for ledgers is taken
from the company's journal. According to Prof Chambers: Ledger is the principle book of accounts
among merchants in which the entries in all others books are entered According to Arther
Fieldhouse: Ledger is the permanent store house of all transactions
Long Term Assets: Long Term Assets is a term used in accounting for assets and property that
cannot easily be converted into cash. For Example: Land, Building, Machinery, Furniture & goodwill.
The value of a company's property, equipment and other capital assets, minus depreciation. This is
reported on the balance sheet. A stock, bond or other asset that an investor plans to hold for a long
period of time.
Matching principle: The matching principle is a culmination of accrual accounting and the revenue
recognition principle. They both determine the accounting period, in which revenues and expenses
are recognized. According to the principle, expenses are recognized when obligations are (1) incurred
(usually when goods are transferred or services rendered, e.g. sold), and (2) offset against
recognized revenues, which were generated from those expenses (related on the cause-and-effect
basis), no matter when cash is paid out. In cash accountingin contrastexpenses are recognized
when cash is paid out, no matter when obligations are incurred through transfer of goods or
rendition of services: e.g., sale. In simple words the matching principle: prescribes expenses to be
reported in the same period as the revenues that were earned as a result of the expenses.
Margin of safety (safety margin) is the difference between the intrinsic value of a stock and its
market price. Another definition: In Break even analysis (accounting), margin of safety is how much
output or sales level can fall before a business reaches its breakeven point. Margin of Safety = Actual
Sales - Breakeven Sales
Methods of depreciation There are several methods for calculating depreciation, generally based on either the
passage of time or the level of activity (or use) of the asset.
Straight-line depreciation: Straight-line depreciation is the simplest and most often used method. In this
method, the company estimates the salvage value(scrap value) of the asset at the end of the period during
which it will be used to generate revenues (useful life). (The salvage value is an estimate of the value of the
asset at the time it will be sold or disposed of; it may be zero or even negative. Salvage value is also known as
scrap value or residual value. The company will then charge the same amount to depreciation each year over
that period, until the value shown for the asset has reduced from the original cost to the salvage value.
Straight-line method:

For example, a vehicle that depreciates over 5 years is purchased at a cost of $17,000, and will have a salvage
value of $2000. Then this vehicle will depreciate at $3,000 per year, i.e. (17-2)/5 = 3. This table illustrates the
straight-line method of depreciation. Book value at the beginning of the first year of depreciation is the original
cost of the asset. At any time book value equals original cost minus accumulated depreciation.
Declining Balance Method: Suppose a business has an asset with $1,000 original cost, $100 salvage value,
and 5 years of useful life. First, the straight-line depreciation rate would be 1/5, i.e. 20% per year. Under the
double-declining-balance method, double that rate, i.e. 40% depreciation rate would be used. When using the
double-declining-balance method, the salvage value is not considered in determining the annual depreciation,
but the book value of the asset being depreciated is never brought below its salvage value, regardless of the
method used. Depreciation ceases when either the salvage value or the end of the asset's useful life is reached.
Since double-declining-balance depreciation does not always depreciate an asset fully by its end of life, some
methods also compute a straight-line depreciation each year, and apply the greater of the two. This has the
effect of converting from declining-balance depreciation to straight-line depreciation at a midpoint in the asset's
life. With the declining balance method, one can find the depreciation rate that would allow exactly for full
depreciation by the end of the period, using the formula:

Where N is the estimated life of the asset (for example, in years).

Annuity depreciation: Annuity depreciation methods are not based on time, but on a level of Annuity. This
could be miles driven for a vehicle, or a cycle count for a machine. When the asset is acquired, its life is
estimated in terms of this level of activity. Assume the vehicle above is estimated to go 50,000 miles in its
lifetime. The per-mile depreciation rate is calculated as: ($17,000 cost - $2,000 salvage) / 50,000 miles =
$0.30 per mile. Each year, the depreciation expense is then calculated by multiplying the number of miles
driven by the per-mile depreciation rate.
Sum-of-years-digits method: Sum-of-years-digits is a depreciation method that results in a more accelerated
write-off than the straight line method, and typically also more accelerated than the declining balance method.
Under this method the annual depreciation is determined by multiplying the depreciable cost by a schedule of
fractions. depreciable cost = original cost salvage value, book value = original cost accumulated
depreciation Example: If an asset has original cost of $1000, a useful life of 5 years and a salvage value of
$100, compute its depreciation schedule.
First, determine years' digits. Since the asset has useful life of 5 years, the years' digits are: 5, 4, 3, 2, and
1.Next, calculate the sum of the digits: 5+4+3+2+1=15
The sum of the digits can also be determined by using the formula (n2+n)/2 where n is equal to the useful life of
the asset in years. The example would be shown as (52+5)/2=15
Depreciation rates are as follows:
5/15 for the 1st year, 4/15 for the 2nd year, 3/15 for the 3rd year, 2/15 for the 4th year, and 1/15 for the 5th
year.
Units-of-production depreciation method
Under the units-of-production method, useful life of the asset is expressed in terms of the total number of units
expected to be produced.
Suppose, an asset has original cost $70,000, salvage value $10,000, and is expected to produce 6,000 units.
Depreciation per unit = ($70,00010,000) / 6,000 = $10
10 actual production will give the depreciation cost of the current year.
Depreciation stops when book value is equal to the scrap value of the asset. In the end, the sum of accumulated
depreciation and scrap value equals the original cost.
Units of time depreciation
Units of time depreciation is similar to units of production, and is used for depreciation equipment used in mine
or natural resource exploration, or cases where the amount the asset is used is not linear year to year.A simple
example can be given for construction companies, where some equipment is used only for some specific
purpose. Depending on the number of projects, the equipment will be used and depreciation charged
accordingly.
Group depreciation method
Group depreciation method is used for depreciating multiple-asset accounts using straight-line-depreciation
method. Assets must be similar in nature and have approximately the same useful lives.
Composite depreciation method
The composite method is applied to a collection of assets that are not similar, and have different service lives.
For example, computers and printers are not similar, but both are part of the office equipment. Depreciation on
all assets is determined by using the straight-line-depreciation method.Composite life equals the total
depreciable cost divided by the total depreciation per year. $5,900 / $1,300 = 4.5 years.
Composite depreciation rate equals depreciation per year divided by total historical cost. $1,300 / $6,500 =
0.20 = 20%Depreciation expense equals the composite depreciation rate times the balance in the asset account
(historical cost). (0.20 * $6,500) $1,300. Debit depreciation expense and credit accumulated depreciation.When
an asset is sold, debit cash for the amount received and credit the asset account for its original cost. Debit the
difference between the two to accumulated depreciation. Under the composite method no gain or loss is
recognized on the sale of an asset. Theoretically, this makes sense because the gains and losses from assets
sold before and after the composite life will average themselves out.To calculate composite depreciation rate,
divide depreciation per year by total historical cost. To calculate depreciation expense, multiply the result by the
same total historical cost. The result, not surprisingly, will equal to the total depreciation Per Year
again.Common sense requires depreciation expense to be equal to total depreciation per year, without first
dividing and then multiplying total depreciation per year by the same number.
Main ledger Vs subsidiary ledgerA main ledger is a complete record of financial transactions over
the life of a company. The ledger holds account information that is needed to prepare financial
statements, and includes accounts for assets, liabilities, owners' equity, revenues and expenses. A
main ledger is typically used by businesses that employ the double-entry bookkeeping method -
where each financial transaction is posted twice, as both a debit and a credit, and where each
account has two columns. Because a debit in one account is offset by a credit in a different account,
the sum of all debits will be equal to the sum of all credits. The sub ledger, or subsidiary ledger,
is a subset of the general ledger used in accounting. The sub ledger shows detail for part of the
accounting records such as property and equipment, prepaid expenses, etc. The detail would include
such items as date the item was purchased or expense incurred, a description of the item, the
original balance, and the net book value. The total of the sub ledger would match the line item
amount on the general ledger. This corresponding line item in the general ledger is referred to as the
controlling account. The subsidiary ledger balance is compared with its controlling account balance as
part of the process of preparing a trial balance. As part of an audit, a method of testing balances
may include tracing individual acquisitions to the subsidiary ledger for amounts and descriptions. The
objective of this test is to determine that the current-year acquisitions schedule agrees with related
sub ledger amounts, and the total agrees with the general ledger
Opportunity cost: The cost of an alternative that must be forgone in order to pursue a certain
action. Put another way, the benefits you could have received by taking an alternative action. The
difference in return between a chosen investment and one that is necessarily passed up. Say you
invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you
gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In
this situation, your opportunity costs are 4% (6% - 2%).
Out of pocket cost: An expense incurred and paid for by an individual for personal use, or relating
to one's employment or business. This can also relate to ongoing costs of operating a fixed asset,
such as a car or a home. Some out-of-pocket expenses may be reimbursed by an employer or other
group if the expense is incurred directly on their behalf. In addition, some out-of-pocket expense
categories can be deducted from one's personal income taxes. Common examples of out-of-pocket
expenses include gasoline for a car, taking a business client to lunch and certain medical payments
such as prescription costs. Income tax deductions are often available for expenses related to
education, healthcare, home upkeep and charitable donations. While tax deductions don't represent
a direct reimbursement, there is an ancillary benefit to paying what is typically something that must
be paid anyway.
Off-balance sheet (OBS), or Incognito Leverage, usually means an asset or debt or financing
activity not on the company's balance sheet. Some companies may have significant amounts of off-
balance sheet assets and liabilities. For example, financial institutions often offer asset management
or brokerage services to their clients. The assets in question (often securities) usually belong to the
individual clients directly or in trust, while the company may provide management, depository or
other services to the client. The company itself has no direct claim to the assets, and usually has
some basic fiduciary duties with respect to the client. Financial institutions may report off-balance
sheet items in their accounting statements formally, and may also refer to "assets under
management," a figure that may include on and off-balance sheet items. Under current accounting
rules both in the United States (US GAAP) and internationally (IFRS), operating leases are off-
balance-sheet financing. Financial obligations of unconsolidated subsidiaries (because they are not
wholly owned by the parent) may also be off-balance sheet. Such obligations were part of the
accounting fraud at Enron. The formal accounting distinction between on and off-balance sheet items
can be quite detailed and will depend to some degree on management judgments, but in general
terms, an item should appear on the company's balance sheet if it is an asset or liability that the
company owns or is legally responsible for; uncertain assets or liabilities must also meet tests of
being probable, measurable and meaningful. For example, a company that is being sued for damages
would not include the potential legal liability on its balance sheet until a legal judgment against it is
likely and the amount of the judgment can be estimated; if the amount at risk is small, it may not
appear on the company's accounts until a judgment is rendered.
Off Setting: In trading, an activity that exactly cancels the risks and benefits of another instrument
in the portfolio. An offsetting transaction is used when it is not possible to simply close the original
transaction as desired. This frequently occurs with options and other more complex financial
instruments. In this way, a trader does not have to agree to close the option contract with the party
on the other side of the options trade, but can simply cancel the net affect by entering into an
offsetting transaction. The most basic example of an offsetting transaction occurs in options trading.
Suppose you have sold a call option on 100 shares with a strike price of $35 and an expiration in
three months. To close this transaction before three months is over, you can buy a call option with
exactly the same features, thus exactly offsetting the exposure to the original call option.
Offsetting transactions typically do not factor in transactions costs.
PV Chart: A graphic that shows the relationship between a company's earnings (or losses) and its
sales. The chart tells how different levels of sales affect a company's profits. Companies can use
profit-volume charts to establish sales goals, to analyze whether a potential project is likely to be
profitable and to see the maximum potential profit or loss of a given project, as well as where the
breakeven point lies. Companies use PV charts in cost-volume-profit analysis along with breakeven
charts and contribution charts.
Periodic VS Perpetual Inventory: Periodic Inventory: Primary use of the Periodic inventory
system occurred prior to the introduction of point of sale scanners and computers. Companies such
as drug and hardware stores that sold lots of small merchandise found it easier to update their
inventory balances periodically instead of trying to account for every item sold on a daily basis. The
periodic inventory system allows a company to record sales of merchandise in a special account.
When merchandise gets sold, the company records the revenue but does not record a cost of goods
sold entry. Perpetual inventory: Perpetual means continuous. This is a system where a business
keeps continuous, moment-to-moment records of the number, value and type of inventories that it
has at the business. A computerized accounting system where each item of inventory is linked to
the electronic accounting records creates a perpetual system. Products that have barcodes are
automatically recorded as having been sold at tills in a supermarket when they are swiped.
Inventory levels are automatically decreased as soon as the invoice has been entered and completed
at the till.
Reversing entries A reversing entry is a journal entry made at the beginning of an accounting
period, which reverses selected entries made in the immediately preceding accounting period. A
reversing entry is typically used in situations when either revenue or expenses were accrued in the
preceding period, and you do not want the accruals to remain in the accounting system for another
period. It is extremely easy to forget to manually reverse an entry in the following period, so it is
customary to designate the original journal entry as a reversing entry in the accounting software
when you create it. This is done by clicking on a "reversing entry" flag. The software then
automatically creates the reversing entry for you in the following accounting period. Reversing
entries are passed at the beginning of an accounting period as an optional step of accounting cycle to
cancel the effect of previous period adjusting entries involving future payments or receipts of cash.
The benefit of reversing those adjusting entries is that this eliminates the need to identify what part,
if any, of a particular payment or receipt made or received in the period relates to the previous
period expense or revenue. When reversing entries are not made, the accountant needs to
remember last period adjusting entries and account for any expense/revenue previously recognized
relating to current period payments or receipts. This is done using compound journal entries.
Revenue: The income generated from sale of goods or services, or any other use of capital or
assets, associated with the main operations of an organization before any costs or expenses are
deducted. Revenue is shown usually as the top item in an income (profit and loss) statement from
which all charges, costs, and expenses are subtracted to arrive at net income.
According to Morton Baker: Revenue is the aggregate of values received in exchange for the goods
or services of an enterprise that result in orgagnizatin of enterprise assets According to Meigs &
Others: Revenue is the price of goods and services rendered by a business
Ratio Analysis: A tool used by individuals to conduct a quantitative analysis of information in a
company's financial statements. Ratios are calculated from current year numbers and are then
compared to previous years, other companies, the industry, or even the economy to judge the
performance of the company. Ratio analysis is predominately used by proponents of fundamental
analysis. There are many ratios that can be calculated from the financial statements pertaining to a
company's performance, activity, financing and liquidity. Some common ratios include the price-
earnings ratio, debt-equity ratio, earnings per share, asset turnover and working capital.
Revenue expenditure Vs Capital expenditures Vs Deferred expenditure
Revenue expenditure is the cost to the seller of expenses incurred as soon as he said. Thus, using
the principle of matching to link the expenses incurred with the revenue generated in the same
accounting period. According to Kohier Revenue Expenditure is an expenditure charge against
operation in a term of contrast which capital expenditure There are two types of revenue
expenditure: Maintain income-generating assets. This includes repair and maintenance costs
incurred to support ongoing operations, and to extend the useful life of the asset or better.
Deferred expenditure: The term deferred expense is used to describe a payment that has been
made, but it wont be reported as an expense until a future accounting period. example of a deferred
expense is the $12,000 insurance premium paid by a company on December 27 for insurance
protection for the upcoming January 1 through June 30. On December 27 the $12,000 is deferred to
the balance sheet account Prepaid Insurance. Beginning in January it will be expensed at the rate of
$2,000 per month. Again, the deferral was necessary to achieve the matching principle
Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital
expenditure is incurred when a business spends money either to buy fixed assets or to add to the
value of an existing fixed asset with a useful life extending beyond the taxable year. According to S
Kr. Paul Capital Expenditure consists of those expenditure the benefit of which carried over to the
several accounting period CAPEX are used by a company to acquire or upgrade physical assets such
as equipment, property, or industrial buildings. In the case when a capital expenditure constitutes a
major financial decision for a company,
Single entry system: records each accounting transaction with a single entry to the accounting
records, rather than the vastly more widespread double entry system. The single entry system is
centered on the results of a business that are reported in the income statement. The core
information tracked in a single entry system is cash disbursements and cash receipts. Asset and
liability records are usually not tracked in a single entry system; these items must be tracked
separately. Single entry systems are strictly use for manual accounting systems, since all
computerized systems utilize the double entry system instead.It is generally possible for a trained
accountant to reconstruct a double entry-based set of accounts from single entry accounting records,
though the time required may be substantial. By doing so, you can then reconstruct the balance
sheet and statement of cash flows.
Single entry Vs double entry
Single-entry Double-entry
Definition Single-entry system of bookkeeping Double-entry system requires
requires inputting the entry only putting one entry twice, once in
once in either the credit column or the credit column and once in the
the debit column.
debit column of another account.
Duality Is not based on the concept of Is based on the concept of duality.
duality.
Accounts Maintains simple and personal Maintains all personal, real and
accounts of debtors, creditors and nominal accounts.
cashbook.
Profit Or Loss Cannot help in making the Can help in making the companys
companys profit or loss statement. profit or loss statement.
Suitability Small businesses where transactions Big businesses and corporations
are small and simple. that deal with complex
transactions and huge inventories.
Trial Balance Cannot prepare trial balance Can prepare trial balance
Tax Purpose Is not acceptable for tax purposes. Is acceptable for tax purposes.
Financial Position Cannot ascertain the true financial Can ascertain financial position of
position of the business. the business.
Advantages Simple, less-expensive, easier to Complete data is available,
manage, provides general view of provides an arithmetic check on
earnings and expenditure. bookkeeping, helps track debits
and credits, can help ascertain the
financial position of the business,
makes it easier to produce year-
end accounts.
Disadvantages Incomplete data, are not able to Expensive, harder to understand,
provide a check against clerical requires hiring external staff and
error, does not record all time-consuming.
transactions, does not provide a
detailed record of assets, theft and
loss cannot be detected.
Special JournalsSpecial Journals are designed to facilitate the process of journalizing and posting
transactions. They are used for the most frequent transactions in a business. For example, in
merchandising businesses, companies acquire merchandise from vendors, and then in turn sell the
merchandise to individuals or other businesses. Sales and purchases are the most common
transactions for the merchandising businesses. A business such as a retail store will record the
following transactions many times a day for sales on account and cash sales.
Description Debit Credit Description Debit Credit
Accounts Receivable XXX Cash XXX
Sales XXX Sales XXX
Sales Tax Payable XXX Sales Tax Payable XXX
In order to save time for journalizing the entries, and posting
the entries to the general ledgers and subledgers, Special Journals are used instead. An accountant
can be specialized in a type of journal entry and several accountants can work each on 1 or more
different types of journal entries only thereby using a better division of labour.
Sunk Cost: A cost that has already been incurred and thus cannot be recovered. A sunk cost differs
from other, future costs that a business may face, such as inventory costs or R&D expenses, because
it has already happened. Sunk costs are independent of any event that may occur in the future.
When making business or investment decisions, individuals and organizations typically look at the
future costs that they may incur, by following a certain strategy. A company that has spent $5
million building a factory that is not yet complete, has to consider the $5 million sunk, since it cannot
get the money back. It must decide whether continuing construction to complete the project will help
the company regain the sunk cost, or whether it should walk away from the incomplete project.
Suspense account: A suspense account is an account used temporarily to carry doubtful receipts
and disbursements or discrepancies pending their analysis and permanent classification.It can be a
repository for monetary transactions (cash receipts, cash disbursements & journal entries) entered
with invalid account numbers. The account specified may not exist, or it may be deleted/frozen. If
one of these conditions exist, the transaction should be directed to a suspense account. A suspense
account is an account in the general ledger in which amounts are temporarily recorded. The
suspense account is used because the proper account could not be determined at the time that the
transaction was recorded. When the proper account is determined, the amount will be moved from
the suspense account to the proper account. Suspense accounts should be cleared at some point,
because they are for temporary use. Suspense accounts are a control risk.
Temporary Vs Permanent accounts Temporary accounts are accounts that go into your income
statements ( Revenue and Expenses Accounts) plus withdrawal account. These accounts get closed
at the end of the fiscal year because they don't carry any balance into the following year.
Example: Let's assume you own a small grocery store and at the end of your fiscal year you earn a
revenue of $10,000 (in sale) , expenses related to the revenue is $6,000 and withdrawal $1,000
cash from your business account. When you start a new fiscal year you will have a zero balance in
your revenue, expense and withdrawal accounts because it's a new year and the revenue (sale) from
last year will have nothing to do with your new year's revenue and the same goes to expenses and
withdrawals accounts. Permanent accounts are also called real accounts because they don't get
closed up at the end of fiscal year. These accounts stay open as long as the company remains in
business. Real accounts are all assets accounts, liabilities ( includes unearned revenues) and equity
accounts.
Trade discount: An amount or rate by which the catalog, list, or retail price of an item is reduced
when sold to a reseller. The trade discount reflects the reseller's profit margin and usually varies
directly with the quantity of the item purchased. A trade discount represents the reduction in cost of
goods or services sold in the business environment. Trade discounts can help small businesses save
money when purchasing goods or services from suppliers. Many suppliers require small businesses to
pay within a specific time frame to receive the trade discount. These terms are usually expressed as
1/10 Net 30; this means a company will receive a 1 percent discount if the bill was paid within 10
days or the full amount is due within 30 days. Trade discounts can also be an important tool for
driving business sales. According to Pyle & Larson: trade discount is the discount that may be
deducted from a cataling list price to determine the invoice price of goods
Trial BalanceA Trial Balance is a list of all the General ledger accounts (both revenue and capital)
contained in the ledger of a business. This list will contain the name of the nominal ledger account
and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit
balance value or a credit balance value. The debit balance values will be listed in the debit column of
the trial balance and the credit value balance will be listed in the credit column. The profit and loss
statement and balance sheet and other financial reports can then be produced using the ledger
accounts listed on the trial balance.
According to W. B. Meigs & R. F. Meigs: the roof of the equality of debit and credit balances of all
accounts is called Trial Balance
User so Accounting information: helps users to make better financial decisions. Users of financial
information may be both internal and external to the organization.
Internal users (Primary Users) of accounting information include the following:
Management: for analyzing the organization's performance and position and taking
appropriate measures to improve the company results.
Employees: for assessing company's profitability and its consequence on their future
remuneration and job security.
Owners: for analyzing the viability and profitability of their investment and determining any
future course of action.
Accounting information is presented to internal users usually in the form of management accounts,
budgets, forecasts and financial statements.
External users (Secondary Users) of accounting information include the following:
Creditors: for determining the credit worthiness of the organization. Terms of credit are set by
creditors according to the assessment of their customers' financial health. Creditors include
suppliers as well as lenders of finance such as banks.
Tax Authourities: for determining the credibility of the tax returns filed on behalf of the
company.
Investors: for analyzing the feasibility of investing in the company. Investors want to make
sure they can earn a reasonable return on their investment before they commit any financial
resources to the company.
Customers: for assessing the financial position of its suppliers which is necessary for them to
maintain a stable source of supply in the long term.
Regulatory Authorities: for ensuring that the company's disclosure of accounting information is
in accordance with the rules and regulations set in order to protect the interests of the
stakeholders who rely on such information in forming their decisions.
Value added tax (VAT): is a form of consumption tax. From the perspective of the buyer, it is a
tax on the purchase price. From that of the seller, it is a tax only on the value added to a product,
material, or service, from an accounting point of view, by this stage of its manufacture or
distribution. The manufacturer remits to the government the difference between these two amounts,
and retains the rest for themselves to offset the taxes they had previously paid on the inputs.The
purpose of VAT is to incentivise the production of critical resources required to sustain an economy,
in the form of VAT-exempt goods. In the absence of VAT, an economy may tend towards production
of services that cannot sustain it i.e., if all farmers became lawyers, everyone would starve. VAT
also incentivises businesses to spend on expanding their operations, as much of the expenditure on
expansion can be deducted from the VAT payable to the revenue service.
Working capital (abbreviated WC) is a financial metric which represents operating liquidity
available to a business, organization or other entity, including governmental entity. Along with fixed
assets such as plant and equipment, working capital is considered a part of operating capital. Net
working capital is calculated as current assets minus current liabilities. It is a derivation of working
capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If
current assets are less than current liabilities, an entity has a working capital deficiency, also called a
working capital deficit.
Weighted averageAn average in which each quantity to be averaged is assigned a weight. These
weightings determine the relative importance of each quantity on the average. Weightings are the
equivalent of having that many like items with the same value involved in the average.
According to Weston & Brigham: The target proportions of debt, preferred stock and common
equity, along with the competent cost of capital, are used to calculate the firms weighted average
cost of capital To demonstrate, let's take the value of letter tiles in the popular game Scrabble.
Value: 10 8 5 4 3 2 1 0 Occurrences: 2 2 1 10 8 7 68 2
To average these values, do a weighted average using the number of occurrences of each value as
the weight. To calculate a weighted average:
1. Multiply each value by its weight. (Ans: 20, 16, 5, 40, 24, 14, 68, and 0)
2. Add up the products of value times weight to get the total value. (Ans: Sum=187)
3. Add the weight themselves to get the total weight. (Ans: Sum=100)
4. Divide the total value by the total weight. (Ans: 187/100 = 1.87 = average value of a Scrabble
tile)
3C in accounting? In accounting, the cost principle is part of the generally accepted accounting
principles. Assets should always be recorded at their cost, when the asset is new and also for the life
of the asset. For instance, land purchased for $30,000 is appraised at the much higher value because
the housing market has risen, but the reported value of the land will remain $30,000 The
consistency principle requires accountants to be consistent from one accounting period to another
in applying accounting principles, methods, practices, and procedures. In other words, the readers of
a companys financial statements can presume that the same rules and measurements were followed
in all of the years being reported. If a change is made to a more preferred accounting method, the
effects of the change must be clearly disclosed. The conservatism principle is the general concept
of recognizing expenses and liabilities as soon as possible when there is uncertainty about the
outcome, but to only recognize revenues and assets when they are assured of being received. Thus,
when given a choice between several outcomes where the probabilities of occurrence are equally
likely, you should recognize that transaction resulting in the lower amount of profit, or at least the
deferral of a profit. Similarly, if a choice of outcomes with similar probabilities of occurrence will
impact the value of an asset, recognize the transaction resulting in a lower recorded asset valuation.
2/10, n/30: "2" shows the discount percentage offered by the seller.
"10" indicates the number of days (from the invoice date) within which the buyer should pay the
invoice in order to receive the discount

"n/30" states that if the buyer does not pay the (full) invoice amount within the 10 days to qualify
for the discount, then the net amount is due within 30 days after the sales invoice date.

2/10 net 30 means a discount for payment within 10 days. The purpose of this is to shorten accounts
receivable cycles for those who provide credit terms. This is essential when vendors have accounts
receivable turnover cycles which exist longer than preferred. A business that offers a 2/10 net 30
discount is expressing that it is more important to have cash as quickly as possible than it is to have
the full amount of their payable. The fact that lack of cash is one of the main reasons businesses fail
makes these terms commonplace. Businesses love to offer 2/10 n 30 for 2 reasons: it makes
customers happy while speeding up cash cycles.

There is no single 2/10 net 30 formula. Despite this, 2/10 net 30 interest rate equations can often
fall into this model:

If paid within 10 days:

Invoice Amount X 98% = 2/10 net 30 effective interest rate

If paid within 30 days:

Pay the invoice in full