Sie sind auf Seite 1von 82

Foundations of

Entrepreneurship
Basic Accounting and
Financial Statements

Operating Cycle of a Business


The operating cycle
is the average period
of time required for a
business to make an
initial outlay of cash
to produce goods, sell
the goods, and receive
cash from customers
in exchange for the
goods.

Image curtesy http://wbbbb-ams.blogspot.in

Financial Statements: Medium of


Communication
Financial statements are the
primary means of communicating
financial information to all
stakeholders of the business
organization.
Primary information to
understand performance.
Financial statements are
prepared on quarterly, halfyearly, and annual frequency.

Understanding Business
Operations
Accounting
Systems

Accounting as
per Income Tax
Act

Tax authority
and creditors

Financial
Accounting
System
Preparation of
three basic
Accounting
Statements

External
stakeholders

Managerial
Accounting
System

Preparation of
plans, forecast,
and reports

Internal decision
makers

Reliability of Accounting
Data

In order for accounting information to


be useful, it must follow certain
qualities and meet certain
standards.
Innovations in accounting is so
ubiquitous that the global agencies
are constantly striving to find new
standards
to
meet
the
challenge.
Investor
Creditor
Employe
Collaborato Customer
Bankers
s Stakeholders
s
es
rs
s
seeking
accounting
information:

Hours after defending


economy, China statistics chief
placed under investigation

The man in charge of Chinas widely


derided economic data is under
investigation, apparently for corruption.
Just a week ago, Wang Baoan, the head of
Chinas statistics agency, had appeared in
front of the media to insist the countrys
economic data was"genuine and reliable."
On Tuesday, he turned out again to
express confidenceabout the economy
and markets.

International Body for Setting Accounting Standard

International Accounting Standards Board


(IASB)
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.It also helps multinational
companies consolidate financials of subsediaries.
The IASB is the independent standard-setting body of
the IFRS Foundation.
Financial Accounting Standard Board (FASB) USA

Indian Accounting Standards


Indian Accounting Standards are a set of
accounting standards notified by the Ministry
of Corporate Affairs which are converged with
International Financial Reporting
Standards (IFRS).
These accounting standards are formulated by
Accounting Standards Board of Institute
of Chartered Accountants of India.
Ministry of Corporate Affairs notifies the
Indian Accounting Standards (Ind AS).

Sample Accounting Standards

(dont try to

memorize)

AS 1: Disclosure of Accounting Policies - All significant


accounting policies adopted in the preparation and
presentation of financial statements should be disclosed.
AS 2: Valuation of Inventories: It is to formulate the method
of computation of valuation of stock, determining the closing
stock is to be shown in balance sheet till it is not sold and
recognized as revenue. It should be shown as market value
of inventory.
AS 3: Cash Flow Statement: It is an additional information
statement exhibiting the flow of incoming and outgoing cash.
It assesses the ability of the enterprise to generate cash and
utilize. One of the tools for assessing the liquidity or solvency
of the enterprise.
AS 4: Contingencies and Events Occurring after the Balance
Sheet Date.
AS 5: Net Profit or Loss for the period, Prior Period Items and
Changes in Accounting Policies.

Basic Financial Statements


Balance Sheet
Profit & Loss Account
Cash Flow Statement

Balance Sheet

Basic accounting equation


Assets = Liabilities + Owners capital

The balance sheet is a snapshot of the


assets and liabilities of the enterprise as at
a point of time. It refers to particular date,
usually as at the close of business of a
a quarter,(sources
half yearof
orfund)
year .
period:
Liabilities
Owners capital
Non-current liabilities (also known as Long
term )
Current liabilities (also known as Short term)

Assets

(application of fund)

Non-current assets

Liabilities as on a particular date


Owners Capital
Term loan from bank
Working capital loan from bank
Sundry creditors
Provisions
Total liabilities
A provision can be a liability of uncertain timing
or amount. A liability, in turn, is a present
obligation of the entity arising from past events,
the settlement of which is expected to result in
an outflow from the entity of resources

Assets as on a particular
date
Land and Buildings
Other Fixed Assets
Inventories
Goods in process
Sundry debtors
Cash
Total Assets

Statement of Profit and Loss for the Period


Sales or Revenue
Cost of materials consumed
Changes in Inventories of Finished Goods,
Stock-in-Process and Stock-in-Trade
Salaries
Interest or finance cost
Depreciation and amortization
Total expenses
Profit before tax
Tax
Profit for the period transferred to Balance
Sheet

Cash Flow Statement


Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities

Owners Capital
Initial and subsequent investment
made by the owners in the business.
Net surplus or profit generated by
the business that has been
reinvested.
Funds raised through various rounds
of investment by Business Angel and
Venture Capitalists also form part of
equity capital.

Profit & Loss Account

Cash Flow Statement


Cash flow is classified under three
heads:
cash flows from
operating activities,
investing activities and
financing activities.

Cash flow statement provides


relevant information in assessing a
company's liquidity, quality of
earnings and solvency.

https://www.youtube.com/watch?
v=VdJF8wMt4_U

EXPLANATIONS OF A FEW
TERMS
Entity: It is a specific area of accountability, a
clear-cut boundary for reporting (such as a firm)
Transaction: Any event that changes the financial
position of an entity
Book keeping: Recording of business transactions
Entry: Record in the books of accounts in respect
of a transaction.
Double-Entry: Two entries are made for every
transaction

For any transaction, the following exist:


- Receiver (or debtor), whose amount
increases
- Giver (or creditor), whose amount
decreases
Example:
Transaction: Cash is paid to buy
computer.
- The total amount invested in computer
increases
The amount is debited to Computer

EXPLANATIONS OF A FEW MORE


TERMS
Corporation: A business
organized as a separate
legal entity and
Assets:
benefit

owned by stockholders

Economic resources that are expected to


future activities

Liabilities: Entitys economic obligations to nonowners


Owners Equity: It is the excess of assets over the
liabilities
Paid-up Capital: The ownership claim arising from
funds paid up
by the owners

Retained Earnings: The ownership claim arising


from the
reinvestment of profits.
Accounts Receivable (Debtor) : Amounts due from
customers for
sales on open account
Accounts Payable (Creditor): Amounts owed to
vendors for
purchases on open account
Revenue: Increase in the owners claims arising
from the
delivery of goods or services
Expense: Decrease in the owners claims arising
from
delivering goods or services or using
up assets
Profits (Earnings, Income): The excess of revenues
over expenses

Types of Account
- Personal: Debtors, Creditors, Capital Account of the
Owner (person or organization)
- Real Accounts: Assets of the firm (land, buildings,
cash, bank accounts, etc.) that continues to either
accumulate or reduce.
- Nominal Accounts: Expenses, Losses, Gains, and
Revenue (value becomes nil at the end of accounting
period)
Account
Form of an account:
Dr.

Date Particula Amount


rs

Cr

Date Particula Amou


rs
nt

ACCOUNTING CONVENTIONS
1. Continuity or Going Concern
Convention
- The firm is an entity in itself.
2. Objectivity (or Verifiability)
- Acquisition cost is more verifiable than
replacement cost or resale value.
3. Materiality
- Minor items with small values are
assumed to be
consumed within a year and are expensed
off.
4. Conservatism
- Inventory is valued at cost or market
value,
whichever is lower.

6. Recognition
- The accrual basis rather than cash
basis
7. Matching and Cost Recovery
- Linking revenues (Sales) with expenses
(COGS)
- Assets are carried forward to recover
costs
of these assets in the future
8. Stable Monetary Unit
- Inflation is generally ignored.

Recognition of Transaction
Cash basis of accounting
revenue and expenses are
recognized when cash is
received and paid respectively.
Accrual basis of accounting
revenue, expenses, assets, and
liabilities are recognized when
the actual transaction takes
place irrespective of whether
cash is paid or received.

Chart of Accounts
A chart of accounts (COA) is a created list of the
accounts used by an organization to define each
class of items for which money or the equivalent is
spent or received. It is used to organize the finances
of the entity and to segregate expenditures, revenue,
assets and liabilities in order to give interested
parties a better understanding of the financial health
of the entity.
Normally defined by an identifier and a heading
explaining text title and coded by account type. The
starting point of a computerized accounting systems.

Starting Point of Recording


Entries
Journal Entry
- The book in which entries are
recorded.
- It is also called the book of
General entry.
Journal
original
Dat Description Debi Cre
e
t
dit

T-Accounts or
Ledger
The book which contains the

accounts.
- It is also called the Principal
Book.
- It contains various accounts
both personal, real, and
nominal
- Entries in the journals are
Nameinof
posted
theAccount
ledger.

For example: Sales


Debit

Credit

Books for Recording Entries


T-Accounts

or

Ledger

- The book which contains the accounts.


- It is also called the Principal Book.
- Balances in the different ledgers finally merge
in financial statements.
- Entries in the journals are posted in the
ledger.

The Accounting Cycle


Transaction

Journal

Account Ledger T Account

Passing Adjustment Entries


Statements

Adjusted Trial Balance

Financial

Closing the books

Journal
Date

Trial Balance

Description

Debit

Ap
ril

0 Cash
1
Contribution
to Capital

10000
0

Ap
ril

0 Computer
2
Cash
Bills
Payable

25000

Ap
ril

0 Cash
5
Term Loan
from Bank

50000
0

M
ay

0 Cash
1
Term loan
repayment

Credi
t
1000
00
1500
0
1000
0

10000

Ledger
Name of
Account
For example:
Sales
Debit

Profit & Loss Account


Sales or Revenue
Cost of materials
consumed

Changes in Inventories of
Finished Goods, Stock-inCredit Process and Stock-inTrade
Salaries
Interest or finance cost

5000
00

Depreciation and
amortization

1000
0

Total expenses
Profit before tax

The Accounting Cycle


Transactions during the period
Journal entries (Dr./Cr. classified
transactions)
Respective General Ledger (from journal
and opening entries from previous period)
Trial Balance to check error
Pass adjustment entries
Revised or adjusted Trial Balance
Financial statements
Closing Entries to close all temporary
accounts

1. Transactions
Financial transactions - sale or return of a product, purchase of supplies for business
activities, or other financial activity that involves the exchange of the companys assets, the
establishment or payoff of a debt, or the deposit from or payout of money to the companys
owners.
2. Journal entries
Transactions are listed in the journal, maintaining the journals chronological order following
the double entry principle. The journal is also known as the book of original entry.
3. Posting in ledgers (General ledger account)
The transactions are posted to the respective account that they impact.
4. Trial balance
At the end of the accounting period (which may be a month, quarter, or year depending on a
businesss practices), you calculate a trial balance.
many times your first calculation of the trial balance shows that the books arent in balance.
If thats the case, you look for errors and make corrections calledadjustments,which are
tracked on a worksheet.
Adjustments are also made to account for the depreciation of assets and to adjust for onetime payments (such as insurance) that should be allocated on a monthly basis to more
accurately match monthly expenses with monthly revenues.
6. Adjusting journal entries
You post any corrections needed to the affected accounts once your trial balance shows the
accounts will be balanced once the adjustments needed are made to the accounts.
7.
Financial statements
You prepare the balance sheet and income statement using the corrected account balances.
8. Closing the books
You close the books for the revenue and expense accounts and begin the entire cycle again
with zero balances in those accounts.

Adjustment Entries
Prepaid expenses or unearned
revenues
Accrued expenses and accrued
revenues
Non-cash expenses

Rules for T-Account Entries


Asset
Debit
for
increa
se

Credit
for
decrea
se

Liability

Equities

Debit
for
decrea
se

Debit
for
Decrea
se

Credit
for
increas
e

Credit
for
increas
e

Revenue account is credited when a sales is


made.
Expense accounts are debited when they are
incurred.
You can find your own simple way to remember
the conventions.

Balance Sheet

Owners Capital
General Journal

Journal

Date
Term loan from
bankDescription
Apr

Cash

Working capital loan


1
Contribution to
Capital
from bank

Debit
100000

0
2

Computer
Cash
Bills Payable

25000

Apr

0
5

Cash

500000

Total liabilities

Term Loan from


Bank

Fixed assets
Inventories

Cash
Total Assets

Salaries
50000
Interest
10000 or finance cost

0
1

Cash
Term loan
repayment

10000

Ma
y

0
2

Furniture
Bills Payable

5000

Sundry debtors

in Inventories
of Finished Goods,
15000
Stock-in-Process
and
10000
Stock-in-Trade
0

Ma
y

Goods in process

Credit
Cost
of materials
consumed
10000
Changes
0

Apr

Sundry creditors
Provisions

Profit & Loss


Account
Sales or Revenue

Depreciation and
amortization
5000

Total expenses
Profit before tax
Tax
Profit for the period

Journal Entry Example


General Journal
Date
Description
Apr 0 Cash
il
1
Contribution to
Capital
Apr 0 Computer
il
2
Cash
Bills Payable
Apr 0 Cash
il
5
Term Loan from
Bank
Ma 0 Term loan repayment
y
1
Cash
Ma 0 Furniture
y
2
Bills Payable

Debit
100000

Credit
10000
0

25000
15000
10000
500000
50000
0
10000
10000
5000
5000

General Ledger Principal book of account

Name of Account
Cash
Debit Credi
t
Op.
Bal
(1)
(2)
(3)
(4)

--1000
00
5000
00

(5)
(6)
5750

Name of Account
Shareholders
Fund
Debit
Credit
Op. Bal.
(1)

1500
0

--100000
100000
Name of Account
Fixed Assets
Debit
Credit

1000
0

Op.
Bal.
(1)
25000

----

General Ledger
Name of Account
Bills Payable

Name of Account
Term Loan

Debit

Credit

Debit

Credit

Op. Bal.
(1)
(2)

--10000
5000

Op. Bal.
(1)

--500000

15000

(2) 10000
490000

Trial Balance and


Adjustment Entries
Trial balance is a statement of all debits
and credits in a double-entry account
book, with any disagreement indicating
an error.
Adjusting entriesare
journalentriesmade at the end of the
accounting period to allocate revenue and
expenses to the period in which they
actually are applicable. Usually, those
entries pertain to outstanding expenses,
pre-paid expenses, interest on capital and

Balance Sheet as on
31.03.2014
Equity

100

Fixed assets

--

Reserves &
Surplus

--

Inventory

Bank loan

--

cash

95

Sundry
creditors

--

Sundry debtor

--

Total

100

100

Subscription to equity:

500

Advance for office premises

10

Interior

20

Furniture & Fixtures

100

Bank loan

400

Asssembly line

500

Purchase

500

Sale in cash

600

Purchase

1000

Rent

50

Sales on credit to Abc

700

Sales (500 cash and 200 credit


to Abc)

700

Subscription to equity

100

Interest

60

Salary

50

Transportation

25

Attorney fee

10

Insurance

50

Plant and m/c: 1,00,000


Building:
50,000
Provision for depreciation
Plant and m/c
Building

10,000
2,500

P/L Account (Depreciation) Dr. 12,500


Machinery A/C
CR. 10,000
Building A/C
CR. 2,500

Balance Sheet

Liabilities
Capital

100000

Term Loan

490000

Bills Payable
Total Liabilities

15000
605000

Assets
Fixed Assets

30000

Cash

575000

Total Assets

605000

Capital and Revenue Expenses


Capitalized expenses.Expenditures to procure assets
that remain with the company for a long time (thumb
rule is >1 year), such as the cost of equipment, land,
and vehicles etc., cannot be deducted in the same way
as current expenses. Asset purchases, since they are
expected to generate revenue in future years, are
treated as investments in business. They must be
deducted over a number of years, or capitalized. The
general rule is that if an item has a useful life of one
year or longer, it must be capitalized.
Revenue expenses.Revenue expenses are everyday
costs of keeping your business going, such as rent, rawmaterials, salary, and electricity bills. You subtract the
amounts spent from your business's gross income in the
year the expenses were incurred.

Revenue and Expenses


Entries
Revenue

Expenses

Retained
Earnings

Debit
for
decrea
se

Debit
for
increa
se

Debit
for
Decrea
se

Credit
for
increa
se

Credit
for
decrea
se

Credit
for
increas
e

Journal
Date

Description

Debit

April 0
1

Cash
Sundry Debtors
Sales (revenue)

50000
50000

April 0
2

Rent

5000

April 0
5

Raw-materials
Cash
Sundry creditors

50000

May

0
1

Cash

10000

0
2

Cost of sales
Inventory

60000

3
0

Salary
Cash

10000

3
0

Interest to bank
Cash

10000

May
May
May

Credit

100000

Cash
Sundry creditors

4000
1000
10000
40000

Sales (revenue)

10000
60000
10000
10000

Journal

Revenue and Expense


Transactions

Date

Description

Debit

June 0
1

Computer
Cash

50000

June 0
2

Printer
Cash
Sundry creditors

15000

June 0
5

Raw-materials
Cash
Sundry creditors

40000

July

0
1

Cash
Sundry Debtors
Sales (revenue)

100000
100000

0
2

Cost of sales
Inventory

75000

3
0

Creditors
Cash

41000

July
July

Credit
50000
4000
11000
10000
30000
200000

75000
41000

Name of Account
Sales (Revenue)
Debit Credi
t
Op.
Bal
(1)
(2)
(3)
(4)
(5)
(6)

1000
00
1000
0
2000
00

3100

Profit & Loss Statement


Sales
Expenses
Raw-materials
consumption
Salary
Rent
Interest
Total Expenses
Profit before tax
Tax
Net profit

110000
60000
10000
5000
10000
85000
25000
5000
20000

Operating Profit
Operating profit: a profit from
business operations (gross profit
minus operating expenses) before
deduction of interest and taxes. The
profit earned from a firm's normal
core business operations. This value
does not include any profit earned
from the firm's investments (such as
earnings from firms in which the
company has partial interest) and

Minority Interest
In accounting terms, if a company owns a minority
interest in another company but only has a minority
passive position (i.e. it is unable to exert influence),
then all that is recorded from this investment are the
dividends received from the minority interest. If the
company has a minority active position (i.e. it is able
to exert influence), then both dividends and a percent
of income are recorded on the company's books.
Share of profit/loss of associate concern(s).
A non-current liability that can be found on a parent
company's balance sheet that represents the
proportion of its subsidiaries owned by minority
shareholders.
Source: Investopedia

Consolidated Profit
Operating profit
+ Other income
Profit before interest and
exceptional items
() Interest
+/() Exceptional items
() Amortization/impairment
Profit from ordinary activities
before tax
() Tax
Net profit
+/() Minority interest
+/() Share of profit from
associate companies

Three Forms of Profits


(Rupees in millions)

2014

2013

Net Sales

2,000

1,800

-900

-700

1,100

1,100

-400

-250

700

850

Other Income (Expense)

-100

50

Extraordinary Gain (Loss)

400

-100

-200

-150

800

650

-250
550

-200
450

Cost of Goods Sold


Gross Profit
Operating Expenses (Selling General
& Administrative)
Operating Profit

Interest Expense
Net Profit Before Taxes (Pretax
Income)
Taxes
Net Profit

Cost of Goods Sold


Beginning Finished Goods Inventory
+ Cost of Goods Manufactured
Closing stock of Finished Goods
Gross Profit = Sales Cost of Goods
Sold

Two Sets of Accounting


As per income tax Act
As per companys Act
Major difference between the two statements is in
the method of estimation of the income tax .
The different methods of estimation of
depreciation leads to the difference in estimated
tax liability.
http://www.saiindia.gov.in/english/home/Our_Products/Audit_Report/
Government_Wise/union_audit/recent_reports/union_performance/2
014/DT/Report_20/Chap_2.pdf

Depreciation
Depreciationisan expense that is supposed to reflect the
loss in value of a fixed asset.
For example:
if a machine will completely wear out after ten year's use,
the cost of the machine is charged as an expense over
the useful life of tenyear rather than all at once, when
the machine is purchased.
Straight line depreciation charges the same amount to
expense each year. Accelerated depreciation charges
more to expense in early years, less in later years.
Depreciation is an accounting expense. In real life, the
fixed asset may grow in value or it may become worthless
long before the depreciation period ends.

Methods of Depreciation
Straight Line Depreciation

Same depreciation is charged


over the entire useful life.

Reducing Balance
Depreciation

Depreciation expense decreases


at a constant rate as the life of an
asset progresses.

Sum of the Year' Digits


Depreciation

Depreciation charge declines by a


constant amount as the life of the
asset progresses.

Units of Activity
Depreciation

Depreciation charge varies each


period in proportion to the change
in level of activity.

Depreciation and
Amortization

Depreciation based on use


(activity)
Depreciation rates as per income tax
Act vary across assets. It can go up
to 100% for some assets depending
on prospective life of the asset and
government policies to encourage
use of certain machinery.

Straight line depreciation


method
Depreciation = (Cost - Residual value) /
Useful life
Procurement cost: Rs. 500,000/Useful life: 10 years
Residual or salvage value at the end of
reasonable useful life: Rs. 30,000/Annual depreciation = (500,00030,000)/10 = Rs. 47,000/- p.a.

Declining Balance Method


Depreciation = Book value x Depreciation rate
Book value = Procurement cost - Accumulated depreciation
Example
Procurement cost = 500,000 (procurement cost is also
referred to as gross block)
Depreciation in the first year = 500,000*0.1=50,000
Book value of the assets at the end of first yr.=(500,00050,000) = 450,000
Depreciation in the second year = 450,000*0.10 = 45,000
Book value of the assets at the end of 2 nd yr. = 450,00045,000) = 405,000
Depreciation in the third year =405,000*0.10 = 40,500
Accumulated depreciation for three years =
50,000+45,000+40,500 = 135,500
Book value of asset or written down value of asset or net
fixed assets = (Gross fixed assets accumulated
depreciation) = 500,000 -135,000 = 365,000
Gross fixed assets or Gross Block is the procurement cost
of all fixed assets of a company.

Declining Balance Method


Gross fixed assets

10
0 100 100 100 100 100 100 100

Depreciation
during the year

10

Accumulated
depreciation

10 19

27

34

41

47

52

57

Net fixed assets


(Book Value)

90 81

73

66

59

53

48

43

Year

Straight Line Method of


Depreciation
1
2
3
4

Book Value
(Purchase Cost in
1st yr.) of Fixed
Assets

550,000

Salvage value

50,000

Depreciation

()
50,000

4,50,000

()50,000

4,00,000 3,50,000 3,00,00


0

()50,00
0

()50,00 ()50,0
0 00

Net Fixed depreciation


Assets
450,000
4,00,000
3,50,000 3,00,000
2,50,00
Accumulated
in five years
= 50,000*5=200,000,
Book value
0
afterValue
5 years: 3,50,000

Declining Balance Method of


Depreciation
Year
1
2
3
4
5
Book Value of Fixed
Assets

550,000 4,95,00
0

4,45,50
0

4,00,95
0

3,60,85
5

Depreciation

()55,00
0

()49,5
00

(-)44,55
0

(-)40,09
5

(-)36,08
6

4,95,00 4,45,50
0
0

4,00,95
0

Net Fixed Assets


Value

3,60,85 3,24,76
5Deprecia 9
t
on @ 1 i
0%
Accumulated depreciation in five years = 50,000+45,000+ =2,25,231

Depreciation at Accelerated
Pace
Depreciation rate for double
declining balance method
= Straightline depreciation
rate x 200%
Depreciation rate for 150%
declining balance method
= Straight line depreciation
rate x 150%

Sum-of-the-years'-digits
method
The digits of the years of residual useful life
of asset is added up.
Depreciation = (asset value salvage
value)*(remaining useful life)/(sum of the
digits)
Depn. Yr1 = (500,000-30,000)*10/
(1+2+3+4+5+6+7+8+9+10) i.e. [55]
2nd yr = 470,000*9/55
3rd Yr = 470,000*8/55
4th Yr = 470,000*7/55

Why depreciation is allowed as


an expense?
Depreciation is allowed to replace the
value of an asset to the extent it has
depreciated during the relevant period of
accounting and as the value has, to the
extend, been lost, the corresponding
allowance for depreciation takes place.
The depreciation is provided to enable the
industry to conserve sufficient funds to
replace plant and machinery at the expiry
of its useful life.

Amortization
1. The paying off of debt with a fixed repayment
schedule in regular instalments over a period of time.
Consumers are most likely to encounter amortization
with a mortgage or car loan.
2. The spreading out of capital expenses for intangible
assets over a specific period of time (usually over the
asset's useful life) for accounting and tax purposes.
Amortization is similar to depreciation, which is used
for tangible assets, and to depletion, which is used
with natural resources. Amortization roughly matches
an assets expense with the revenue it generates.

Amortization
Amortization is an accounting term that refers
to the process of allocating the cost of an
intangible asset over a period of time. It also
refers to the repayment of loan principal over
time.
As a general rule, an asset should be
amortized over its estimated useful life, or the
maturity or loan period in the case of a bond
or a loan. If an intangible asset has an
indefinite life, such as goodwill, it cannot be
amortized.

DEFINITION of 'Deferred Tax


Liability'
An account on a company's balance sheet
that is a result of temporary differences
between the company's accounting and tax
carrying values, the anticipated and enacted
income tax rate, and estimated taxes payable
for the current year. This liability may or may
not be realized during any given year, which
makes the deferred status appropriate.

Ref: http://www.investopedia.com

Pareto 80-20 Tule


8020 rule a general rule of thumb in
business that says that 20% of the items
produce 80% of the action20% of the product
line produces 80% of the sales, 20 percent of the
customers generate 80% of the complaints, and
so on. In evaluating any business situation, look
for the small group which produces the major
portion of the transactions you are concerned
with. This rule is not exactly accurate, but it
reflects a general truth, nothing is evenly
distributed. Referred to as Pareto principle

Expenditure and Expense


Expenditurean expenditure occurs when something is acquired
for a businessan asset is purchased, salaries are paid, and so on.
An expenditure affects the balance sheet when it occurs. However,
an expenditure will not necessarily show up on the income statement
or affect profits at the time the expenditure is made. All expenditures
eventually show up as expenses, which do affect the income
statement and profits. While most expenditures involve the exchange
of cash for something, expenses need not involve cash. (See expense
below.)
Expensean expenditure which is chargeable against revenue
during an accounting period. An expense results in the reduction of
an asset. All expenditures are not expenses. For example, a company
buys a truck. It trades one assetcashto acquire another asset. An
expenditure has occurred but no expense is recorded. Only as the
truck is depreciated will an expense be recorded. The concept of
expense as different from an expenditure is one reason financial
reports do not show numbers that represent spendable cash. The
distinction between an expenditure and an expense is important in
understanding how accounting works and what financial reports
mean.

Who are the consumers of


accounting information / financial
statements?