Commerce

Debit and Credit

A debit is an accounting entry that either increases an asset or expense account, or decreases
a liability or equity account. It is positioned to the left in an accounting entry.
A credit is an accounting entry that either increases a liability or equity account, or decreases an asset
or expense account. It is positioned to the right in an accounting entry.

Capital Reserve and Reserve Capital

Capital Reserve means the part of profit reserved by the company for a particular purpose such as to
finance long-term projects or to write off capital expenses.
Reserve Capital shows the part of the authorized capital that has not yet been called up by the company
and is available for drawing, if necessary.

Profit a liability?
The profit belongs to the owner of a sole proprietorship or to the stockholders of a corporation. Hence,
it is regarded as a liability for the business.

Negative Net worth

A condition in which a company’s liabilities exceed its assets plus shareholders equity.
- Negative net worth can occur because a company borrowed too much money and subsequently
had its income fall as its debt payments rose. It also may occur if the value of assets declines.

Zero Based Budgeting

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each
new period. The process of zero-based budgeting starts from a "zero base," and every function within
an organization is analysed for its needs and costs.
- Budgets are then built around what is needed for the upcoming period, regardless of whether
each budget is higher or lower than the previous one.

What is GAAP?
GAAP is short for Generally Accepted Accounting Principles. GAAP is a cluster of accounting
standards and common industry usage.
One of the reasons for using GAAP is so that anyone reading the financial statements of multiple
companies has a reasonable basis for comparison, since all companies using GAA P have created their
financial statements using the same set of rules.

Trial Balance
A trial balance is a bookkeeping or accounting report that lists the balances in each of an
organization's general ledger accounts.

Why does Closing Stock not appear in Trial Balance?

Closing stock is the leftover balance out of goods which were purchased during an accounting period.
Total purchases are already included in the trial balance.
 Commerce

Standard Costing
Standard costing is the practice of substituting an expected cost for an actual cost in the accounting
records. Subsequently, variances are recorded to show the difference between the expected and actual
costs.

Marginal/Direct Costing
Direct costing is a specialized form of cost analysis that only uses variable costs to make decisions. It
does not consider fixed costs, which are assumed to be associated with the time periods in which they
were incurred.
- The direct costing concept is extremely useful for short-term decisions, but can lead to harmful
results if used for long-term decision making, since it does not include all costs that may apply
to a longer-term decision.

When was bank nationalization done?

1960, according to the RBI Act, 1934. Where Indira Gandhi passed an ordinance to nationalize 14
largest commercial banks. They had 85 percent of bank deposits in the country.
- To facilitate the Govt. to have more control of credit delivery.

Double Entry System in Accounting

The double entry system of accounting or bookkeeping means that for every business transaction,
amounts must be recorded in a minimum of two accounts. The double entry system also requires that
for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.

Debentures
A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures
are backed only by the general creditworthiness and reputation of the issuer.
- Convertible debentures can be converted into equity.
- Non-convertible vice-versa.

What is LIFO/FIFO?
FIFO is a contraction of the term "first in, first out," and means that the goods first added to inventory
are assumed to be the first goods removed from inventory for sale.
LIFO is a contraction of the term "last in, first out," and means that the goods last added to inventory
are assumed to be the first goods removed from inventory for sale.

Why does Balance Sheet always balance?

The major reason that a balance sheet balances is the accounting principle of double entry.

Different ways to calculate Depreciation

1. Straight Line
2. Written-Down Value Method
 Commerce

AGM and EGM

An annual general meeting (AGM) is a mandatory yearly gathering of a company's interested
shareholders.
At the AGM, the directors of the company present an annual report containing information for
shareholders about the company's performance and strategy. Shareholders with voting rights vote on
current issues, such as appointments to the company's board of director s, executive compensation,
dividend payments and selection of auditors.
An extraordinary general meeting (EGM), also called a special general meeting or emergency
general meeting. An EGM is usually called on short notice and deals with an urgent matter, often
concerning company management.

Breakeven Point
The break-even point (BEP) or break-even level represents the sales amount—in either unit (quantity)
or revenue (sales) terms—that is required to cover total costs, consisting of both fixed and variable
costs to the company.

Total profit at the break-even point is zero.

Big Push Model in Economics

The big push model is a concept in development economics or welfare economics that emphasizes that
a firm's decision whether to industrialize or not depends on its expectation of what other firms will do.

Economic Multiplier
In economics, a multiplier refers to an economic factor that, when increased or changed, causes
increases or changes in many other related economic variables. In terms of gross domestic product,
the multiplier effect causes gains in total output to be greater than the change in spending that caused
it.

Deferred Revenue
Deferred revenue is a liability because it refers to revenue that has not been earned.

Accrued Expenses vs Deferred Expenses

An accrued expense is a liability that represents an expense that has been recognized but not yet paid.
A deferred expense is an asset that represents a prepayment of future expenses that have not yet been
incurred.

Elasticity of Demand
Price elasticity of demand is an economic measure of the change in the quantity demanded or
purchased of a product in relation to its price change. Expressed mathematically, it is:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

 Commerce

Return on Equity
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by
shareholders' equity.
Because shareholders' equity is equal to a company’s assets minus its debt, ROE could be thought of
as the return on net assets.

Capital Market and Money Market

Money markets are used by government and corporate entities as a means for borrowing and lending
in the short term, usually for assets being held for up to a year.

Capital markets include the equity (stock) market and debt (bond) market.

Role of Capital Markets

Capital market plays an important role by contributing to the growth of the country’s economy. It
helps in diffusing stresses on the banking system by matching long-term investments with long-term
capital.

Role of Money Markets

The money market plays a significant role in the economy. It serves as a market for indulging in
transactions for a short period. Liquidity.

Price-Earnings Ratio - P/E Ratio

The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share
price relative to its per-share earnings (EPS).

The price-to-earnings ratio or P/E is one of the most widely-used stock analysis tools used by investors
and analysts for determining stock valuation.
In addition to showing whether a company's stock price is overvalued or undervalued, the P/E can
reveal how a stock's valuation compares to its industry group or a benchmark like the S&P 500 Index.

Role of SEBI
The SEBI is the regulatory authority in India established under Section 3 of SEBI Act
1. To protect the interests of the investors in securities
2. To promote the development of, and to regulate, the securities market and for matters
connected therewith and incidental thereto.
 Commerce

Derivative
A derivative is a financial security with a value that is reliant upon, or derived from, an underlying
asset or group of assets.
The derivative itself is a contract between two or more parties, and its price is determined by
fluctuations in the underlying asset. Eg. Options, futures, forwards and swaps.

Options, Futures and Forwards

An option is similar to a futures contract in that it is an agreement between two parties to buy or sell
an asset at a predetermined future date for a specific price. The key difference between options and
futures is that, with an option, the buyer is not obligated to "exercise" the option, while the option
seller is obligated to either buy or sell the underlying asset if the buyer chooses to exercise the
contract.
1. Put Option – A put option is an option contract giving the owner the right, but not the
obligation, to sell a specified amount of an underlying security at a specified price within a
specified time frame.
2. Call Option – Call options are an agreement that give the option buyer the right, but not the
obligation, to buy a stock, bond, commodity or other instrument at a specified price within a
specific time period.
Forward contracts are private agreements between two parties to buy and sell an asset at a specified
price in the future.
Futures contracts are traded on exchanges, making them standardized contracts.
There’s always the chance one party in a forward contract may default. Futures contracts have
clearing houses that guarantee the transactions.

Balance of Payments (BOP)

The balance of payments is a statement of all transactions made between entities in one country and
the rest of the world over a defined period of time, such as a quarter or a year. Basically, exports –
imports.
The balance of payments divides transactions in two accounts: the current account and the capital
account (sometimes the capital account is called the financial account, with a separate, usually very
small, capital account listed separately) .
1. The current account includes transactions in goods, services, investment income and current
transfers.
2. The capital account, broadly defined, includes transactions in financial instruments and
central bank reserves.

Budget Surplus and Deficit

A budget surplus is a period when income or receipts exceed outlays or expenditures. A budget deficit
occurs when expenditures exceed revenue.

Customs and Excise Duty

Customs Duty is a tax imposed on imports and exports of goods. To protect domestic industries from
more efficient or predatory competitors from abroad.
 Commerce

An excise or excise tax (sometimes called an excise duty) is a type of tax charged on goods produced
within the country (as opposed to customs duties, charged on goods from outside the country). It is a
tax on the production or sale of a good. This tax is now replaced by GST.

How can the government create demand during recession?

The government can boost demand by cutting tax and increasing government spending.
Lower income tax will increase disposable income and encourage consumer spending. Higher
government spending will create jobs and provide an economic stimulus.

Sunk Cost
A sunk cost is a cost that has already been incurred and cannot be recovered. A sunk cost differs
from future costs that a business may face, such as decisions about inventory purchase costs or
product pricing. Sunk costs (past costs) are excluded from future business decisions because the cost
will be the same regardless of the outcome of a decision.

Synergy (Mergers and Acquisition)

Synergy is the concept that the value and performance of two companies combined will be greater
than the sum of the separate individual parts. Synergy is a term that is most commonly used in the
context of mergers and acquisitions (M&A).
Synergy, or the potential financial benefit achieved through the combining of companies, is often a
driving force behind a merger.
- Synergy is reflected on a company's balance sheet through its goodwill account.
- Synergy can also be negative. Negative synergy is derived when the value of the combined
entities is less than the value of each entity if it operated alone.

Discounted Cash Flow (DCF)

Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based
on its future cash flows.
- DCF analysis finds the present value of expected future cash flows using a discount rate.
- A present value estimate is then used to evaluate a potential investment. If the value calculated
through DCF is higher than the current cost of the investment, the opportunity should be
considered.

Net Present Value – NPV & Internal Rate of Return – IRR

Net present value (NPV) is the difference between the present value of cash inflows (DCF) and the
present value of cash outflows over a period of time.

Basically, NPV = Initial cash outlay – DCF

Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project
zero.