ACCOUNTING PRINCIPLES

Money Measurement Concept Accounting records state only those facts about a business firm, which can be expressed in monetary terms. In other words, business events and facts that cannot be expressed in monetary terms, howsoever important they may be, are excluded.

For example, the death of the managing director who was guiding the destiny of the company since its inception, the emergence of a better product at a lower price in the market, the emergence of a new technology and so on (though very significant from the future perspective of business) are ignored.

The operational implication of the Money Measurement Concept is that financial statements do not provide all information about the business.

Going Concern Concept The Going Concern Concept implies that the firm will continue to operate in the foreseeable future. The operational implication of this assumption is that assets are not shown in Balance Sheet at their realisable market value, which implies liquidation value.

Instead, evaluation of assets is with reference to the value of goods and services they are likely to produce in future years to come.

Cost Concept Assets/resources owned by the firm are shown at their acquisition cost and not at current market value/current worth.

The rationale for this assumption is that it provides objective and verifiable basis for accounting records. Market valuation of assets in use is not only difficult to be made but also is related to subjectivity. Besides, market values may be constantly subject to change.

Above all, determination of objective and undisputed market price of assets, say of land and buildings, plant and machinery, furniture and so on that are not intended for sale is fairly expensive and time consuming. Further, it is important to note that these long-term assets are acquired to be used in business and not for resale.

Clearly, Cost concept is a logical fall-out of Going Concern concept in which current market value of assets does not hold relevance.

Evidently, individual assets (except cash and bank balances) shown in Balance Sheet do not reflect their current market value. Some assets such as land and buildings in major cities may have higher valuation than shown in books and some other assets, like plant and machinery may have lower valuation than shown in records.

Conservative Concept As the name suggests, Conservative Concept warrants use of conservatism in business records. In relation to Income Statement, the principle is, "anticipate no profits unless realised but provide for all probable future losses". Stock of finished goods is valued at the cost of the market price whichever is lower.

Likewise, it is normal for the firms to provide for likely irrecoverable sum from debtors by creating provisions for bad and doubtful debts at the end of accounting year. This assumption safeguards over-estimation of profits. Accounting Period Concept Accounting Period Concept requires that Income Statement should be prepared at periodic intervals for purposes such as performance evaluation and determination of taxes. Conventionally, the time span covered is one year. Corporate firms, as per Companies Act, are required to produce interim accounts and many business firms produce monthly or quarterly accounts for internal purposes. Very often, the accounting period chosen is 1st April to 31st March to conform to the financial year of Government. Other accounting periods adopted may be calendar year (January 1 December 31), Diwali year, Dussehra year and so on. Accrual Concept Accrual Concept is a fall-out of Accounting Period concept. This concept requires that expenses incurred for a particular accounting period should be reckoned in the same period, irrespective of the fact whether these expenses have been paid in cash or not in that year. The same holds true for revenues, i.e., revenues earned in a specific accounting period are construed as incomes of the same period, irrespective of their receipts.

This concept is very important to compute true income of a business firm for each accounting period. Let us illustrate. Suppose, a business firm has salary bill of Rs 50 lakh per month. Due to the cash shortage, even though employees worked, the firm could not pay salary for two months. The salary paid is for 10 months only (Rs 50 lakh 10 months = Rs 500 lakh). In the following accounting year, the firm will be required to pay salaries for 14 months (including salary arrears of 2 months of the preceding year) that is, Rs 50 lakh 14 months = Rs 700 lakh. The question we are to address is, how much should be considered as salary expenses in both these years. Should it be on the basis of cash payment? If it is so, salary expenses in previous year is to be reckoned as Rs 500 lakh and in the current year Rs 700 lakh. Or, should it be on accrual basis? In the latter

situation, it will be Rs 600 lakh in each of these two years.

Evidently, cash basis of expenses recognition has an inherent drawback of manoeuvring and distorting income results of the accounting periods. Under this approach, other things being equal, profit of the previous year will be higher (by Rs 200 lakh) as compared to the current year. Obviously this misrepresents income/profit figures of both these years. Due to this, wrong inferences are drawn about the better performance in the previous year compared to the current year, which is not true. The correct approach obviously is to treat salary expenses of Rs 600 lakh in both the years.

In the absence of Accrual accounting, the Income Statement may indicate more profit in one year at the cost of the profits of some other year, which is entirely inappropriate and illogical. In other words, cash basis of expense recognition will hamper comparison of profit figures over the years. Clearly, there is a very strong case for a business firm to adopt accrual basis of accounting, known as Accrual accounting to determine correct profits.

From the foregoing, it is apparent that deferring expenses, such as salary, cannot increase profits. Likewise, profits cannot be lowered by advance payment of expenses such as, rent and insurance. For instance, insurance payment of Rs 12 lakh as on January 1, for one full year is to be pro-rated. Assuming the firm has the accounting period from April-March, insurance expenses of Rs 3 lakh only (JanuaryMarch) will form part of income statement of the current year and the balance sum of Rs 9 lakh will be reckoned as expenses of the following year.

What holds true for expenses, the same holds true for revenues. Revenues are recognised at the time of sales and not at the time of receipts from debtors. In operational terms, cash surplus and deficiency are not indicative of profit and loss situations respectively. Matching Principle The Matching concept is, in a way, an extension of Accrual concept. In fact, this is the most comprehensive Accounting Principle that enumerates normative framework of income determination of an accounting period of a business firm.

In simple words, this principle requires matching of expenses/costs incurred to revenues realised in an accounting period. The more perfect this matching is, more correct is the income determination.

As per this principle, revenues as well as expenses are to be estimated for an accounting period. As far as estimation of revenues is concerned, it is, by and large, a relatively simple task. Revenues are equivalent to value of goods and services sold during the specified accounting period, irrespective of actual receipt of cash.

However, cost estimation is a relatively difficult task. The example of Royal Industries was very simple in this regard. In practice, there are many expenditures, which benefit several accounting years. Therefore, these expenses cannot be charged to Income Statement of a single year. For this purpose, it is useful to classify expenses into capital and revenue categories.

Capital expenditures (for instance purchase of plant and machinery) involve relatively large investment sum and often have some sales value. Obviously, the purchase cost of plant and machinery (say of 500 lakh) cannot be considered as an expense of a single accounting year in which it is purchased; its cost needs to be spreadover (technically known as depreciation), on some scientific basis, among all the years in which this machine is used. In practice, however, there will be subjectivity involved on the amount of depreciation to be charged every year.

In contrast, revenue expenses, such as rent, salaries, stationary, repairs, etc., benefit one accounting year only and, hence fully charged/written off against the revenues of the same year. They require relatively small sums and do not have sales value. At the best, adjustment for advance/arrears may be needed (already explained under Accrual concept). This adjustment is simple arithmetic exercises and does not involve subjectivity. Thus, for revenue expenses items, the Matching principle is easy to follow.

However, even in the revenue category, there are certain expenses, which are essentially revenue in nature (in the sense that they do not have sales value) but the benefits from them extend to more than one accounting year. For instance, massive advertisement expenditure incurred in launching a new product needs to be shared by the subsequent year(s) also, as it promotes sales of these years and hence augments revenues of these years. Evidently, it is very difficult to apportion with precision the share of advertisement expenditure to be charged in Income Statements of the affected accounting periods. Other notable examples are flotation costs incurred while raising funds through issue of shares/debentures, and Research and Development expenditures. The firms, in practice, are expected to evolve some scientific criterion to apportion these expense items over the years. Howsoever-tall claims may be made about objectivity in this regard, arbitrariness and subjectivity cannot be done away with. It remains in the system.

Above all, there are certain loss items (say loss by fire in godown when goods are not insured and theft of cash/goods), which neither contributes towards generation of revenues of the current period nor of future revenues. They are to be written off in the same accounting year in which they occur, as per convention.

To summarise, Matching Principle clearly brings to fore the problems encountered by business firms in its income determination. A logical corollary of this follows that income determination of a business firm is more an estimate than the actual one. Consistency Principle Matching principle has underlined the importance of treatment of capital expenditure items in income determination process. It focuses on the equitable methods, which must be used to write off the cost of plant

and machinery (and in that way of other long-term assets) so that its cost is fairly allocated as expense, in form of depreciation, to each accounting period throughout its estimated useful life. There are various methods of charging depreciation. The two notables methods are, Straight-Line Method (SLM) and Written Down Value Method (WDV).

The assumption underlying the SLM is that depreciation is basically a function of time. Accordingly, the cost of depreciation is allocated equally to each year of the estimated useful life of plant and machinery. The sum of depreciation is obtained by dividing the depreciable cost of machine (Purchase price of machine - Estimated Salvage Value) by the number of estimated economic useful life (in years).

In contrast, according to the WDV method, a fixed rate (say 25%) is applied to the cost of the machine (disregarding salvage value) of the first year to determine depreciation charge. In each subsequent period, the depreciation expense is determined with reference to the same fixed rate (25 %) to the written down balance (cost of machine less depreciation in the first year). Obviously, both the methods will provide different answers towards depreciation charges.

The Consistency Principle requires that there should be a consistency of accounting treatment of items (say depreciation method used in respect of plant and machinery) in all the accounting periods. For instance, if Straight Line method of depreciation is used for plant and machinery, the same should be used year after year. Switching over to Diminishing Balance method in any of the subsequent years will obviously affect depreciation charges and, hence, their profits. As a result, the profit picture will not be comparable over the years and, therefore, the justification and relevance of consistency principle.

Likewise, there are different methods for valuation of inventory such as, Last-in-First-Out, First-in-First-Out, Weighted Average Cost Method and so on. In order to maintain uniformity and reveal true and fair view of the performance of business firm, the accounting policies should be followed on a consistent basis. In case, there is a necessity to change, the impact of such a change should be clearly mentioned.

From the foregoing discussion, it is apparent that accounting principles/concepts/conventions have a marked bearing on preparation of both, the Income Statement and the Balance Sheet.

Glossary of Accounting Terms

1.Account: A record that holds the results of financial transactions. 2.Accountant's Equation: The equation that is the basis of the Balance Sheet: Assets = Liabilities + Owners' Equity. 3.Accounting: A service that oversees, measures, and evaluates financial information for decision making purposes. 4.Accounts Payable: Amounts due from your business to your creditors. Generally these are short term liabilities (30-120 days), and are shown under the Current Liabilities section in the Balance Sheet. 5.Accounts Receivable: Amounts due to your business from your customers. Generally these amounts are short term receivables (30-120 days), and are shown under Current Assets section in the Balance Sheet. 6.Accounts Receivable Turnover: A measure used to determine a company's average collection period for receivables. Usually computed by dividing net sales (or net credit sales) by average accounts receivable. 7.Accrual Basis Accounting: The practice of bookkeeping when income is recorded when earned and expenses are recorded when they are incurred. 8.Aging Schedule: A schedule showing the length of time an invoice has been outstanding or held. Aging schedules are normally created for Accounts Payable and Accounts Receivable. For example, an aging schedule for accounts receivable can show how many days an invoice has been outstanding. Aging schedules can also be created for inventory. 9.Amortization: The gradual and periodic reduction of an amount over time. It can apply to either the periodic write-down of an asset (see depreciation) or a gradual extinguishment of a debt (payments reducing loan principal). 10.Annual Percentage Rate (APR): Also known as effective annual rate, is used to put investments with varying interest compounding periods (daily, monthly, semiannually) on a common basis. It is computed as follows: APR = (1 + r/m) m - 1.0 where r = the stated, nominal, or quoted rate, and m = the number of compounding periods per year. 11.Annual Report: A report prepared by a business entity at the end of its calendar or fiscal year. It presents a company's financial position and operating results for use by interested parties, including potential investors, creditors, stockholders, and employees. 12.Arm's-Length Transaction: Business dealings between independent and rational parties who are looking out for their own interests. 13.Assets: Economic resources owned or controlled by a person or company. Audit: The result of an independent accountant's review of the financial statements and their footnotes to ensure compliance with generally accepted accounting principles (GAAP) and to express an opinion on the fairness of the financial statements. Audit Opinion: The official result of an audit. A CPA's "unqualified opinion" means that the financial statements he/she has audited present fairly the financial position and operating results of the company in

conformity with GAAP. A "qualified opinion" occurs under a number of circumstances, for instance, if the financial statements do not follow GAAP and the client refuses to make the needed changes. An "adverse opinion" happens when the financial statements are misleading and do not fairly represent a company's financial position. (Just because you passed an audit, it does not mean that your company is in good financial shape. It just means that your books are a fair representation of what you did.) Bad Debt: An uncollectible Account Receivable . Balance sheet: A balance sheet is an itemized statement which lists the total assets and the total liabilities of a given business to show its net worth at a given moment in time (like a snapshot). Bank Reconciliation: Verification that your bank statement and your checkbook balance. Bankruptcy: This involves a discharge of the debtor's obligations through court order. The purpose of bankruptcy is to provide the debtor with a fresh start and to have an equitable distribution of the debtor's assets among the creditors. Board of Directors: Individuals elected by the stockholders to govern a corporation. Bond: A contract between a borrower and a lender. The borrower promises to pay a specified rate of interest for each period the bond is outstanding and repay the principal at the maturity date. Bookkeeping: The act of systematically recording the financial transactions affecting a business. Book Value: The net amount (original value plus or minus any adjustments such as depreciation) shown in the accounts for an asset, liability, or owners' equity item. Break-even point: The volume point of sales at which revenues and costs are equal; a combination of sales and costs that will yield a no profit/no loss operation. Budget: A formal statement of management's expectations of sales, expenses, volume, and other financial transactions of an organization. A budget is a tool for planning and control. In the beginning it can act as a plan and in the end it can act as control to measure performance against so that future plans can be improved. Business: An organization created with the objective of making a profit from the sale of goods or services. Business Failure: According to law, business failure can be either "technical insolvency" or "bankruptcy." In technical insolvency a business is unable to meet current obligations even if the total assets exceed total liabilities. In bankruptcy, liabilities exceed the market value of the assets and a negative net worth exists. (See accountant's equation). Calendar Year: An entity's reporting year, covering 12 months and ending on December 31. (See: Fiscal year) Capital: Property or money used and owned by a business and used to acquire future income or benefits. Capital Account: An account where an owner's or partners' interest in the business is recorded. It is increased by owner investment and net income and decreased by withdrawals and net losses. Capital Gain or Loss: The difference between the market and book value at purchase or other acquisition realized at the sale or disposition of a capital asset.

Capital Expense: A capital expenditure is one that will benefit one year or more. It can increase the quantity or quality of services to be gained from the asset. It is charged to an asset account. Capital Lease: Although the lessee does not legally own rental property, the property is theoretically acquired and recorded as an asset with the related liability. Capital Stock: The ownership shares of a corporation authorized by its articles of incorporation, including preferred and common stock. Cash Basis: A bookkeeping method that recognizes revenue and expenses at the time of cash receipt or payment. (Opposite of Accrual Basis.) Cash Flow: Generally refers to the difference between cash receipts and disbursements over a specific period of time. Certified Public Accountant: A designation given to an accountant who has passed a uniform CPA examination and has met other certifying requirements. CPA certificates are issued and monitored by state boards of accountancy or similar agencies. Chart of Accounts: A listing (usually in account number order) of all accounts used by a company. Charter: Also known as Articles of Incorporation. A document issued by a state that gives legal status to a corporation and details its specific rights, including the authority to issue a certain maximum number of shares of stock. Common Stock: A class of stock issued by a corporation. It is the most frequently issued type of stock. It carries with it a voting right, however is secondary in priority to preferred stock in dividend and liquidation rights. Compounding Period: The period of time for which interest is computed. Consignment: In a consignment, the consignor (owner of the goods) transfers goods to the consignee. The consignor retains legal title and includes the goods in his inventory. The consignee is acting as an agent in an attempt to sell the goods. Although the consignee is temporarily holding the goods, the inventory is not an asset on his books. If a sale occurs, the consignee deducts from the selling price his commission and related expenses, remitting the balance to the consignor. Corporation: A type of business organization chartered by a state and given many of the legal rights as a separate entity. Ownership is represented by transferable shares of stock. Cost of Good Sold: COGS; The amount determined by subtracting the value of the ending merchandise inventory from the sum of the beginning merchandise inventory and the net purchases for the fiscal period. Credit: An entry on the right side of a ledger account. Current Assets: Current assets are those assets of a company that are expected to be converted to cash, sold, or consumed during the normal operating cycle of the business (usually one year). Examples are cash, accounts receivable, short-term investments, US government bonds, inventories, and prepaid expenses. Current Liabilities: Liabilities to be paid within one year of the balance sheet date. Current Ratio: Also known as Working Capital Ratio. A measure of liquidity of business. Equal to current assets divided by current liabilities.

Debit: An entry on the left side of a ledger account. Depreciation: The expense recognized in writing off the cost of a plant or machine over its useful life, giving consideration to wear and tear, obsolescence, and salvage value. Methods vary. Examples are straight line (SL), accelerated methods such as sum-of-the-years digits (SYD), and double-declining balance (DDB) methods. Primarily accelerated depreciation is chosen for a business' tax expense but straight line is chosen for its financial reporting purposes. Dividend: That portion of a corporation's earnings that is paid to the stockholders. Drawings: Distribution to the owner(s) of a sole proprietorship or partnership. Drawings Account: The account used to show the withdrawals of earnings by the owner(s) of a sole proprietorship or partnership. Earnings per Share: The computation of a corporation's earnings based on the number of stock shares outstanding at a given point in time. Embezzlement: The act of an employee stealing money or assets of the company. Factor: To sell accounts receivable at a discount before they are due. Fair Market Value: The price at which a willing seller will sell, and a willing buyer will buy, when neither is under compulsion to sell or buy and both have reasonable knowledge of relevant facts. FASB: Financial Accounting Standards Board. The private organization responsible for establishing the standards for financial accounting and reporting in the United States. FIFO: First In First Out type of inventory valuation. The first goods purchased are assumed to be the first goods sold. Fiscal Year: A business' reporting year, covering a 12-month month period. (Not necessarily ending on December 31.) Fixed Assets: Permanent assets of a company required for the regular conduct of business which will not be converted into cash during the next year. Examples are land, building, furniture and fixtures. Fixed Cost: Fixed costs are operating expenses that are incurred when providing necessities for doing business and have no relation to the volume of production and sales (as opposed to "variable costs"). Examples are rent, property taxes, and interest expense. FOB: Free-On-Board Destination. The seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. Franchise: A business that has been licensed to sell the product of a manufacturer or to offer a particular service in a given area. GAAP: Generally Accepting Accounting Principles. A priority listing made up of statements of accounting principles issued by the AICPA (American Institute of Certified Public Accountants) and FASB (Financial Accounting Standards Board) General Journal: (GJ) A book or original entry in a double-entry system. The journal lists transactions and indicated accounts to which they are posted. The general journal includes all transactions which aren't included in specialized journals used for cash receipts, cash disbursements, and other common transactions.

General Ledger: (GL) A book in which monetary transactions of a business are posted (in the form of debits and credits) from a journal. It is the final record from which financial statements are prepared. The general ledger accounts are often the control accounts which report totals of details included in subsidiary ledgers. Goodwill: An intangible asset that exists when a business is valued at more than the fair market value of its net assets. Goodwill is usually due to reputation, good customer relations, etc. Gross Profit: The amount by which the net sales exceed the cost of goods sold. Gross Sales: Total recorded sales before deducting any sales discounts or sales returns and allowances. Internal Control: Policies and procedures designed to provide reasonable assurance that a company's objectives will be achieved. It consists of control environment, risk assessment, control activities, information and communications and monitoring. Interest: The cost of the use of money. Interest Rate: The cost of money expressed as an annual percentage. Inventory: Goods held for sale or resale. Inventory Turnover Ratio: A measure of the management of inventory computed by dividing cost of goods sold (COGS) by the average inventory for a period of time. Invoice: An itemized list of goods shipped or services rendered with cost. Journal: A book or original entry in a double-entry bookkeeping system. The journal lists all transactions and indicates the accounts to which they are posted. Journal Entry: A recording of a transaction where debits equal credits. Just-in-time Inventory: An inventory system that minimizes inventory costs. It arranges for suppliers to deliver small quantities of raw materials just before those units are needed in production. Storing, insuring, and handling raw materials are costs that add no value to the product, and so are minimized in a just in time system. Kiting: Drawing a bank check on insufficient funds to take advantage of the lag time (time interval) required for collection. Certainly not ethical, and under some circumstances very illegal!

Leases: Long-term non-cancelable commitments. In a lease, the lessee acquires the right to use property owned by the lessor. Even though no legal transfer of title occurs, many leases transfer substantially all the risks and ownership benefits.

LIFO: "Last In First Out" assumption of inventory valuation. Limited Liability: The legal protection given to stockholders of a corporation. A stockholder's liability extends only to the total of his capital contribution. Limited Partnership: A limited partnership is one in which one or more partners (but not all) have limited liability up to their investment to creditors in the event of the failure of the business. The general partner manages the business. Limited partners are not involved in daily activities. Liquidation: The process of dissolving a business by selling the assets, paying the debts, and distributing the remaining equity to the owners. Liquidity: The availability of cash or ability to obtain it quickly. Also used to determine debt repayment ability Long-term Liabilities: These are liabilities in your business that are due in more than one year. For example mortgage payable. Lower Cost or Market: LCM. A method of valuing assets at the lower of its original cost or current market value. Modified Accrual: An accounting method that is a combination of cash and accrual basis. Recognition is given to revenue when it is available and measurable. Expenditures are usually reflected in the accounting period in which the liability is incurred. Mutual Agency: The right of all partners in a partnership to act as agents for the normal business operations of the partnership, with the authority to bind it to business agreements. Net Assets: Owners Equity. The ownership interest in the assets of an entity. Equals total assets minus total liabilities. Net Income: The difference between your business' total revenues and its total expenses. This caption and amount is usually found at the bottom of a company Income Statement (also known as "The Bottom Line"). Net Operating Loss: A net operating loss results when business expenses exceed business income for the operating period. Operating Lease: A simple rental agreement. Operating Leverage: The extent to which fixed costs are part of a company's cost structure; the higher the proportion of fixed costs, the faster income increases or decreases with sales volumes. Operating Performance Ratio: An overall measure of the efficiency of operations during a period computed by dividing net income by net sales. Opportunity Cost: A basic term from the disciplines of economics and accounting. In these circles the acceptable definition of the word is, "The advantage forgone as the result of the acceptance of an alternative." Outstanding Stock: Issued stock that is still being held by investors.

Owners' Equity. Net Assets. The ownership interest in the assets of an entity. Equals total assets minus total liabilities.

Partnership: A Partnership is an unincorporated business that has more than one owner. Patent: An exclusive right granted for 17 years by the federal government to manufacture and sell an invention. Patents can cover all sorts of inventions, from physical devices to chemical processes, and even software algorithms. The only restrictions are that the invention be novel and not obvious to current practitioners of the art. Perpetual motion machines are specifically disallowed from getting a patent. Petty Cash Fund: A small amount of cash kept on hand used for making miscellaneous payments. Prepaid Expenses: Amounts paid in advance to a creditor or vendor for goods or services. Insurance premiums are a good example. Prepaid Expenses are a current asset because you paid for goods or services you have not yet received. Present Value of $1: The value today of $1 to be received or paid at some future date given a specified interest rate. Profitability: A company's ability to generate revenues in excess of the costs incurred in producing those revenues. Profit and Loss Statement: Also known as an Income Statement, or P & L. This statement shows your revenues and expenses for a specific period of time. Proprietorship: A business owned by one person. Prospectus: A prospectus is prepared by an entity that wishes to issue securities to investors. Included in the prospectus are financial statements, disclosures (e.g. lawsuit), business plans, overview of corporate operations, and information regarding officers. A "red herring" is a preliminary prospectus that has not been finalized. Public Companies: Corporations whose stock is publicly traded. Qualified Opinion: An opinion issued when an auditor determines his audit has been limited in scope or the entity has not followed GAAP. Reconciliation: A determination of the items necessary to bring the balances of two or more related accounts or statements into agreement. Recovery Period: The time period designated by Congress for depreciating business assets. Can also be thought of as the "life" of an asset (but is usually shorter). Retained Earnings: Profits of the business that have not been paid out to the owners as of the balance sheet date. The earnings have been "retained" for use in the business. Retained Earnings is an account in the equity section of the balance sheet. Return: A key consideration in the investment decision. It is the reward for investing. The investor must compare the expected return for a given investment with the risk involved. Return on Investment: ROI. A measure of operating performance and efficiency in using assets computed by dividing net income by average total assets. Revenues: Increases in a company's resources from the sale of goods or services.

S-Corporations: Formerly known as Subchapter S Corporations. A corporation recognized as a regular corporation under state law but is granted special status for federal income tax purposes.

Salvage or Residual Value: Estimated value (or actual price) of an asset at the end of its useful life after disposal costs. Shareholders or Stockholders: Individuals or organizations that own shares of stock of a corporation. Solvency: A company's long-run ability to meet all financial obligations. Sole Proprietorship: A business owned by one person. Trade credit: Credit one firm grants to another firm for the purchase of goods or services. Transactions: Exchange of goods or services between businesses or individuals. Can also be other events having an economic impact on a business. Trial Balance: A listing of all account balances that provides a test of whether total debits equals total credits. Unearned Revenue: Money received by a business before it is earned. It is a liability to your company until it is earned. Useful Life: The life that an asset is expected to be useful to the company. Value: The worth of something. Usually defined as the monetary or street value of an item, such as "Fair Market Value." Working Capital: Current Assets minus Current Liabilities. Some business owners like to think of assets being a use of working capital, and liabilities and capital contributions as being a source of working capital. Yield: The return on investment that an investor receives from dividends or interest expressed as a percentage of the current market price of the security (or if already owned, price paid). Z-Score: A z-score is a total arrived at by combining several normal business ratios. The weight given each ratio produces a score which is said to indicate the health of a business. A z-score below 1.5 usually means that the company is close to bankruptcy.