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ACCOUNTING MATERIAL FOR INTERVIEWS

English Essay Writing 1 * 5 = 5 Marks


English Correct the Sentence 5 * 1 = 5 Marks
Multiple Choice Questions 40 * 1 = 40 marks
(Accounts & Finance)
Accounts & Finance Questions need to write Briefly 5 * 2 = 10 Marks
Simple Athematic and Reasoning = 10 * 1 = 10 Marks
-----------Total
70 Marks
-----------If u selected in Written test u will have Next HR Interview (Personal Questions)
and Technical round (Questions on Accounts and finance).
Here i am attaching some imp Questions & Prepare well.
3.Subject Interview
Accounting Definitions & Concepts and Principals
Ratio's with definitions , Shares & debenture
Parent & subsidiary Company
Public ltd Company and Private Ltd Company
Revenue Income/Expenditure
deferred Income/Expenditure
Capital Income/Expenditure
Accrued Income/Expenditure
Time value of money
Zero based Budget
Fixed Cost, variable cost ,marginal cost and Break even
Good will
Amortization
Depreciation & Types
Assets and types of Assets (i.e Tangible and Intangible,ficticious Assets)
partnership and Joint venture and Consignment
Trading P&L and Balance sheet (Format & Schedules) and Trail Balance
Minority Interest or minority ownership
Less than 50% ownership of a corporation's voting stock, or not enough
ownership to control company operations.
From a purely accounting point of view, a parent company which owns less than
100% but more than 50% of a subsidiary
presents the value of the remaining ownership (the minority ownership) on the
balance sheet in a separate account.
In such cases, minority interest is shown as either a liability or an equity item on
the consolidated balance sheet,
and the income (or loss) owed to the minority owners is subtracted from (or
added to) the parent's income to arrive
at a net income number (consolidated).
Lease & its Types
Green shoe option
Cash flow statements
Long Term Debt/Short Term Debt
Non Balance sheet Items (Leases Assets/Foot Notes Items)
margin of safety,
In Finance
Financial Management , divined yield and net worth capital Budgeting
Financial services , Commercial Paper and Venture Capital and Mutual Funds
Portfolio Management ,working Capital and types of Working capital, calculation
methods
and About Project in the Academic
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MADHAV KRISHNA IRRINKI

ACCOUNTING MATERIAL FOR INTERVIEWS

What is book building? -- --Book building is a process where by the company


seeks bids from prospective investors for its Public offer. Based upon the bids
received the offer price is fixed.
What is an IPO? ---- IPO stands for Initial Public offering. The shares are issued
for the first time to the public as opposed to the secondary market.
What is an ADR? ----ADR is American Depository Receipt. A non US company
issues ADRs in US in order to rise capital. An ADR will normally be in multiples of
Equity shares of that company.
What are the various investing opportunities you have?
Real Estate, Government securities, Debentures, Equity Shares, Preference
shares, tax saving Bonds, Mutual funds, Insurance etc.
What is a merger? ----A merger is a transaction between two companies where
by both companies merge into each other and as a result a new company is
formed.
What is a subsidiary company? -- --A company which is controlled by its
holding company. The control could be because of any of the following factors.
More than 50% of capital being owned by holding company.
Majority of the Board of directors of subsidiary are from holding company.
Who are promoters? ----Promoters are the people who initiates the idea of
creating the company. They may/may not join the Board of directors after the
company is formed.
What are consolidated statements? ----These are the financial statements
reported by a holding company and these statements include the financial
performance of its subsidiaries.
What is stock option? ----Stock option is an instrument that carries a right to
buy the underlying stock at a certain price during certain time frame. Normally
issued to the employees of the companies to motivate and retain them.
What is the rule of Nominal accounts? ---Debit all expenses and losses.
Credit all incomes and gains.
What are the important financial ratios a banker looks into when you
approach for loan?
Debt Service coverage ratio
Interest Coverage Ratio
What is a prospectus? - ---It is an invitation asking prospective investors to
invest in the company.
What is the financial year in India ?
Jan-Dec or Apr-mar or July-June?-----Apr1-Mar31
Give example for the following:
Non Cash Expenditures
: Depreciation, Write down of investments,
Provisions.
Intangible assets
: Goodwill, PATENTS, TRADEMARKS
Adjustments after Net Income : Dividends, Interest on capital in case of
partnerships
Contingent liabilities
: Guarantees
Fixed expenses
: Rent, Insurance
All Items which are in Bold are important
1.all accounting concepts
2.revenue expenditures/deferred revenue expenditures/capital expenditure
3.pvt ltd company, public ltd comp
4.Types of shares

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5.share premium/discount on issue of shares


6.memorentum of association
7.ariticles of association
8.subsidary company or holding company
9.minority interest
10.primary market or secondary market
11.stock exchanges in India and abroad
12.depriciation-Acounting standard-6
13.depletion/amortization
14.SEBI(security exchange board India )
15.provision/reserve
16.general reserve or capital reserve
17.debentures and bonus shares
18.divedend-interium and final dividend
19.inventory valuation and methods
20.goodwill valuation and methods
21.cashflow and funds flow
22.working capital
23.marginal cost/margin of safety/break even point/variable cost/semi
variable cost/fixed cost
24.jointventure and partnership
25.non recurring items in p&l account
Ex:sale of investment
26.non cash expenditure acoount in p&l account
ex:depiriciatiaon
27.diff. between revenue and income
28.accrued income
29.debtor/creditor definitions
30.write entry and posting
outstanding salaries
31.accounting treatment:
loss of inventory---no insurance coverage
partly insurance coverage
fully insurance coverage
32. ratio analysis----all ratios are prepared33. form of balance sheet--horizontal\vertical---schedule 6 very important fully covered
34.capital profit and revenue profit
35.rebate u/s 88 of income tax act
36.mutual fund / trade discount/cash discount
37.duties of finance manager
38.interim audit/statutory audit
39.Sensex
Questions asked in Earlier interviews collected from frineds
Provisions Vs Reserves
What is Balance sheet and Cash flow
Schedule 6 format
Trading A/c Vs P&L A/c
Exampls of Non Recurring Expenditure
Revenue Vs Income
Ratio Analysis All formulas
(Imp debt equity , optimim stage of debt equity)
what is cost of goods sold
Finance Manager Duties
Capital expenditure and Fixed expenditure
What is IPO
What is ADR

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Tell about Credit Rating agencies


Diff b/w Gross profit and Net Profit
Leverages (operating and financial )
Leverages usage
Closing stock ( Cost or Market value which is less)
Portfolio Management
Mutual funds
What is "Limited " in company names means
Prospectuses
Quorum
Diff b/w Pvt and Public Limited Company
Income Tax Paid is not treated as Expenditure for Income Tax
Time Value of Money, how it will useful in Capital Budgeting
Father of Economics -- Adam Smith
Father of Scientific MgtFW Taylor
Integrated and Non Integrated Accounts
Holding Vs subsidiary companies
Revaluation Reserve
Recurring and Non Recurring Items in P&l a/c
Association not for profit
Deductions
Accrual Basis and Cash Basis
Goodwill
Working Capital
Costing Basics and important topics
What is meant by B/sheet, Cash flow
How going concern concept reflects in Bashed
(Like margin of safety, variable cost, semi-variable chose)
Q)depreciation, Amortization and Impairment?
Q)cap expr and rev.expr
Q)tangible-intangible
Q)associate & holding ---subsi
if we r having 20 to 50% interest more than 50% subsi
Q)What is appropriation account and what are the
components of
appr.a/c?from Net profit --------to
provide reserves.
Q)what is EPS and DPS?
Q)Asset write-down arises, when on review by a
company, circumstances indicate that the carrying
value of an asset, that an entity holds for usage
may not be recoverable, and if the sum of expected
future cash flows is less than the carrying value of
the asset, an impairment is recognized to the extent
the carrying value exceeds the fair value of the

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asset.
Note: Asset write-down is not to be confused with
depreciation or amortization (which is a regular
charge of the cost of an asset over its estimated

useful life). Asset impairment arises as result of


review of the long-lived assets by an entity, where
as depreciation is a uniform charge of the cost of
the asset over its estimated useful life.
Diff between Capital Resv and Revenue Resrv?
What are the components of B/S?
What is net-worth?
What is differed Expenditure?Where can u find iton B/S?
what is liquid ratio and acid ratio? Debt-Equity ratio?
What is unearned revenue?Ex: Advanced income
What is Working Capital?
Structure of cost sheet?
Functions of financial Mgt?
What is Primary market and Secondary market?
SEBI?
capital expenditure -- money spent for additions
or improvements to structures or equipment that are
used to carry on the activities of an organization
or individual.
Q)capital gain or loss -- the gain or loss incurred
from the sale or disposition of assets including
securities and real estate.
Q)accounting equation -- the basic equation of
double-entry accounting that reflects the
relationship of assets, liabilities and net worth
(reserves + stockholders equity + retained
earnings). The equation may be expressed in its
simplest form as: assets = liabilities + net worth.
Q)accounts payable -- amounts recorded as
liabilities on the books of a company, institution
or individual that are owed, but have not yet been
paid, to a creditor for previously purchased
merchandise or services.
Q)accounts receivable -- amounts recorded as assets

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ACCOUNTING MATERIAL FOR INTERVIEWS


on the books of a company, institution or individual
that are due, but have not yet been collected, from
a debtor for the previous purchase of merchandise or
services.
employee stock options
minority interest
consolidated accounts
kinds of depreciation charge , employee stock options

Mergers and Amalgamations


********Derivatives
mutual funds
open end and close end
option and warrants

FI Questionnaire
1. What is the difference between company and company code?
2. How many chart of accounts can be attached to a company code?
3. How many chart of accounts does SAP define, and its purposes?
4. What are substitutions and validations? What is the precedent?
5. What is a controlling area?
6. Define relationship between controlling area and company code.
7. What is a fiscal year variant?
8. What are special periods used for?
9. What do you mean by year dependent in fiscal year variants?
10. What are shortened fiscal year? When are they used?
11. What are posting periods?
12. What are document types and what are they used for?
13. How are tolerance group for employees used?
14. What are posting keys? State the purpose of defining posting keys?
15. What are field status groups?
16.What are withholding tax types and tax codes?
17. What is a transport request?
18.What is dunning? What is the maximum level of dunning?
19. What is automatic payment program and what are its pre-requisites?
20. What are open items? What is open item clearing?
21.What are house banks? What are bank chains state the purpose of
having bank chains?
22. State the procedure of setting up cash journals?
23. What is a Chart of depreciation?
24. How many chart of depreciation can be assigned to a company code?
25. What is a depreciation key?
26. What are asset classes
27. How is account determination done for assets?
28. What are depreciation areas? What is the purpose of defining depreciation
area?
29. What are cost elements and what are cost element groups?
30. What are cost centers? Define cost center hierarchy?
31. What are primary and secondary cost elements?

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32. How is FI and SD integrated?
33. How is FI and MM integrated?
34. How is FI and Asset module integrated?
35. What is a real Internal order?
36.What is a statistical internal order?
37. What is assessment?
38. What is distribution?
39. What are commitment items?
40. What are internal orders?
41. How are internal orders settled?
42. What is a settlement rule?
.

(1) __________ is concerned with the maximization of a firm's earnings after


taxes.
(a) Shareholder wealth maximization
(b) Profit maximization
(c) Stakeholder maximization
(d) EPS maximization
Answer : B
(2) Which of the following would generally have unlimited liability?
(a) A limited partner in a partnership.
(b) A shareholder in a corporation.
(c) The owner of a sole proprietorship.
(d) A member in a limited liability company (LLC).
Answer : C
(3) Which of the following examples would be deductible as an expense on the
corporation's income statement?
(a) Interest paid on outstanding bonds.
(b) Cash dividends paid on outstanding common stock.
(c) Cash dividends paid on outstanding preferred stock.
(d) All of the above.
Answer : A
(4) In finance we refer to the market where new securities are bought and sold
for the first time as the __________ market.
(a) money
(b) capital
(c) primary
(d) secondary
Answer : C
(5) Which of the following would not improve the current ratio?
(a) Borrow short term to finance additional fixed assets.
(b) Issue long-term debt to buy inventory.
(c) Sell common stock to reduce current liabilities.
(d) Sell fixed assets to reduce accounts payable.
Answer : A
(6) Krisle and Kringle's debt-to-total assets ratio is.4. What is its debt-to-equity
ratio?
(a) .2
(b) .77
(c) .667
(d) .333
Answer : C
(7) Which group of ratios measures a firm's ability to meet short-term
obligations?
(a) Liquidity ratios.

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(b) Debt ratios.
(c) Coverage ratios.
(d) Profitability ratios.
Answer : A
(8) According to the accounting profession, which of the following would be
considered a cash-flow item from a "financing" activity?
(a) A cash outflow to the government for taxes.
(b) A cash outflow to repurchase the firm's own common stock.
(c) A cash outflow to lenders as interest.
(d) A cash outflow to purchase bonds issued by another company.
Answer : B
(9) Cash budgets are prepared from past:
(a) balance sheets.
(b) income statements.
(c) income tax and depreciation data.
(d) None of the above answers are
Answer : D
(10) The accounting statement of cash flows reports a firm's cash flows
segregated into what categorical order?
(a) Operating, investing, and financing.
(b) Investing, operating, and financing.
(c) Financing, operating and investing.
(d) Financing, investing, and operating.
Answer : A
(11) The firm had a net increase of $800,000 in net fixed assets over the last
period. The beginning and ending net fixed asset account balances were
$9,100,000 and $9,900,000 respectively. If the firm purchased $2,000,000 in
additional fixed assets and sold $100,000 of fixed assets at book value, what was
the firm's depreciation expense over the period?
(a) $800,000
(b) $1,100,000
(c) $1,900,000
(d) $2,700,000
Answer : B
(12) If EOQ = 40 units, order costs are $2 per order, and carrying costs are $.20
per unit, what is the usage in units?
(a) 10 units.
(b) 16 units.
(c) 40 units.
(d) 80 units.
Answer : D
(13) What is the book value of common equity per share of common equity
outstanding for the following firm? The firm has 20,000 common shares
authorized of which 15,000 are outstanding at a par value of $1. Additional paidin-capital represents $300,000 and retained earnings are an additional $300,000.
(a) $1
(b) $20
(c) $21
(d) $41
Answer : D
(14) Upon close examination of the income statement, which of the following
mathematical expressions would be true?
(a) Net Sales - Gross Profit = Income from Operations
(b) Gross Profit + Selling, General and Administrative Expenses = Net Sales
(c) Income from Operations - Interest Expense - Income Tax Expense = Net
Income
(d) None of the above are true.
Answer : C

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(15) Which of the following is not a correct expression of the accounting
equation?
(a) Assets - Liabilities = Owners' Equity
(b) Net Assets = Equities
(c) Assets = Equities
(d) Assets = Liabilities + Owners' Equity
Answer : B
(16) The owners' equity section of a balance sheet contains two major
components:
(a) Common Stock and Additional Paid-in Capital
(b) Paid-in Capital and Retained Earnings
(c) Common Stock and Retained Earnings
(d) Net Income and Dividends
Answer : B
(17) Which of the following would not be included on a balance sheet?
( a) Accounts receivable.
( b) Accounts payable.
( c) Sales.
( d) Cash.
Ans:C
(18) If total assets were $21,000 and total liabilities were $12,000 at the
beginning of the year, and if net income for the year was $5,000, what is total
owners' equity at the end of the year?
(a) $ 4,000
(b) 5,000
(c) 9,000
(d) 14,000
Answer : D
(19) Treasury stock involves shares which are:
(a) issued and outstanding.
(b) authorized but not yet issued.
(c) subscribed but not yet authorized.
(d) issued but not currently outstanding.
Answer : D
(20) If a transaction during the year caused one asset to increase by $40,000 and
another asset to decrease by $30,000, which of the following events may have
caused these effects?
(a) Merchandise inventory was purchased and paid for entirely with cash.
(b) Cash was received in exchange for the issuance of common stock.
(c) Equipment was purchased and paid for partly with cash and with an account
payable for the difference.
(d) None of the above could have caused these effects.
Answer : C
(21) Net assets were $9,500 at the beginning of the year and $12,000 at the end
of the year. Merchandise Inventory went up by $1,000 during the year, Accounts
Payable went down by $500, and Accounts Receivable went down by $2,000. If
the Cash account was the only other asset and there were no other liabilities,
what happened to cash during the year?
(a) Cash increased by $2,000.
(b) Cash increased by $3,000.
(c) Cash decreased by $2,000.
(d) None of the above.
Answer : B
(22) The term 'current assets' does not includea) Payments in advance.
b) Bills receivable.
c) Long-term deferred charges.
d) Cash at bank

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Ans:C
(23) The retained earnings balance for Matt & Anne's Food Center at December
31, 2003 was $33,000. The balance at December 31, 2004 was $47,000. During
2004, dividends in the amount of $6,000 were declared and paid to stockholders.
The only other change in retained earnings was due to net income. The net
income for 2004 was?
(a) $8,000
(b) 14,000
(c) 20,000
(d) 26,000
Answer : C
(24) The principle stating that all expenses incurred while earning revenues
should be identified with the revenues when they are earned, and reported for
the same time period is the:
(a) cost principle.
(b) revenue principle.
(c) expense principle.
(d) matching principle.
Answer : D
(25) "The firm must be treated as financially separate and distinct form its'
owner(s)". This rule is known as:
(a) The account

E.O.Q: Economic order Quantity. It is a quality of material that Can be ordered at


which both ordering cost and carring costs are minimum.
E.O.Q = 2AO
A= Annual usage units
O= ordering cost per Annam
C= Carring cost per unit per Annam
Semi Variable Cost : These costs are partly fixed and partly, variable in
relation to out put
For Example:- Telephone bill, Electricity bill
Angle of Incidents:- When both the cost curve and sales curve cuts or meet at a
point. That point is called as Break even point.
- The angle left after profit angle (or) Angle of Incidents
Margin of safety:- Difference between told actual sales-break even sales
Margin of safety = Total sales B.E.P
Margin of safety will be reached faster if angle of Incidents is Total sales = 30000
Margin safety = 30000-20000
BEP sales = 20000
= 10000
Means Excess actual sales over break even sales is called margin of safety.
Absorption Costing: Each and every item of cost i.e, variable cost and fixed cost is
charged to the product.
Case 1: In this case fixed cost are charged to the product on the basis of normal
capacity.
[Normal Capacity The number of units Normally

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produced by the Company
case 2: In case of under Absorption. That cannot should be charged to the P & L
A/C
Case 1: Ex: Normal units 10000
Actual production 12000
Fixed over heads 100000
The absorption rate= fixed overheads/Normal units =100000/00000
And total Absorption should be Restrited to 100000.
In any case. The absorbed Amount should not exceed the actual fixed cost.
Case 2: if the actual production is 8000 units
The absorption Rate = 100000/10000=10// per unit
The amount absorbed Amount= 100000-80000
= 20000
which is charged to the P& L A/C
Marginal Costing:- In the case of Marginal costing only variable cost are
absorbed by the product.
- In this case the fixed costs are considered as period cost and this should
be charged to P & L A/C
Costing: The process of determining cost is called as costing
Variable cost:- 1. Cost which is changing with every change in production
additionally if you want to producing one more unit we need to expend additional
cost variable cost in expected to fluctuate in 10 units 100/- total directly in
proportionate the changes for 11th unit additionally 10/- in value of production
(or) sales.
2. Cost for unit will not change but there is change in total cost 10 units 100Rs
Cost per unit = cost/unit=100/10=10/11units 110/Cost per unit=110/11=10/Fixed Cost:- 1. This cost is fixed will not change with Increase or decrease in
production
Ex:- Factory rent
2. The total cost will not change but cost per unit will change.
Rent 10000
1 person share 10000
2 persons share 50000 each
4 persons share 2500 each
P.V Ratio: Profit value Ratio. It is a Ratio between contribution and sales
P/V Ratio= Contrubution/salesX100
Contribution per unit=sale price-variable cost
Break Even Point (B.E.P)
This is a point at which there is no profit no loss.
At this point to total amount received is equal to the total cost
Total sales Amount-Total Cost Amount (Variable Cost + Fixed cost)
Total contribution=Total fixed cost
Ex: Selling price 10/P/V=10-5
Variable cost 5/=5/Fixed Cost 10000/5/100X100=50%
B.E.P (Units) = Fixed Cost/Contribution per unit
10000/5=200units
B.E.P(Value) = Fixed cost/P/v Ratio
10000/50X100=20000
Statement of Marginal Cost:Total Sales-variable cost= contribution
Contribution-fixed cost=profit
Ratio:
1. Current Ratio: Current Assets/Current liabilities
Current Assets are those which can be converted in to cash in the short run

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The term short run means-generally a period of one year
Current Assets: Inventories + Sundry debtors + cash and bank balance + short
term loans & Advances + Marketable non trade Securities + prepaid Expences.
Current Liabilities:- cash credit + bank O.D + short term borrowings + creditors
+ proposed dividend + unclaimed dividend + provision for taxation (provision for
tax Advance tax paid)
2. Quick Ratio:- Quick Assets/Quick liabilities
Quick Assets = Current Assets-Stock and prepaid expences-other liquid portion of
current Assets
Quick Liabilities = Current Liabilities cash credit, Bank, Borrowing and other
short term Borrowings
3. Debt Equity Ratio:- Debt/Eqity
Debt=Secured loan and unsecured loan less cash credit and Bank O.D
Equity= paid up share capital including preference capital and free reserves
4. Debt service Coverage Ratio:profit after tax+ Interest + Depreciation + non cash items/ Intrest + Debt
Instalment
5. Intrest coverage Ratio:Earnings available to equity share holders/Number of Equity shares
6. P.E Ratio= Price earnings Ratio
market price per share/Earnings per share
7. Dividend yield Ratio = Dividend per share/ market price per share
8. Operating Leverage = Contribution/Earnings before Intrest & Tax
9. Finance Leverage = Earnings Before Intrest & Tax/Earnings Before Tax
Total Leverage = operating Leverage / Finance Leverage
MOA Defines companies Contribution and Scope MOA is the contribution of the
Company this document Represents Rules and Regulation of the Company
MEMORANDUMS
It is a primary document
It is subordinate to the Act
It is a must for every Company
Strict provisions for alteration
Ultra virus MOA even all the members.
Cannot ratify it
SHARES
Shares are a part of the capital of the
company
Share holders are members or Oweners
of the compny
When recommended by the Board
dividend could be declared to share
holders
Shares do not carry on any charge
Shares have restrictions Issue at a
discount
Share holders have voting Rights
Dividend is payable only when profits

ARTICLES
It is Secondary document
It is subordinate to MOA & the Act
Can be written or taken from Company
Act
Special Resolution is sufficient except
where the amendment brings in to
effect a private from public
Ultra virus AOA but intra virus the MOA
can be Ratified
DEBENTURE
Debentures contribute a loan
Debenture holders are creditors
Fixed amount of Intrest on debentures
paid before dividend declaration
Debentures generally have a charge on
the asset of the company
Debentures do not have Restrictions
Issue at a discount
Debenture holders do not have voting
rights
Dividend is payable whether profits are

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ACCOUNTING MATERIAL FOR INTERVIEWS

are there
No fixed dividend

there or not
Rate of Intrest is fixed

SHARE HOLDER
One of the owners of the Company and
has proprietory intrest in the Company
When the Company makes profits and
the board recommends, share holder
gets a share in the profits
No security for his Investment
Eligible for voting rights
On liquidation, share holders are paid
last

DEBENTURE HOLDER
Only a creditor of the Company

SHARE
Has a nominal value
May be fully paid or partly paid
Can be transferred is whole numbers
and not in fractions
Each and every shares shall be of equal
denomination
Shares are identified with distinctive
numbers
Can be issued directly to the public

STOCK
No Nominal value
Always fully paid
Can be transferred in fractions

PROMISSORY NOTE
In a pro-note there is a promise to pay
In a pronote there are two parties the
maker and the payee

BILL OF EXCHANGE
In a bill there is an order to pay
In a bill there are there parties
1. Drawer 2. Drawee
3. Payee
In a bill the drawer and the payee may
be the same
The maker of a bill is liable only when
the drawee does not accept or pay
A bill has to be accepted by the drawee
before he can be held liable

Pronote cannot be made payable to the


maker himself
The maker a pronote is primarily liable
A pronote is signed by the person liable
to pay. so no acceptance is needed
JOURNAL
Journal is the book of first or original
entry. It is also called the Book of first
entry
Transaction in the Journal will be
recorded Immediately
When once the entries are posted to
ledger the Journal Looses its
Importance
In the preparation of final A/Cs Journal
is not useful
The tax authorities generally may not
depend on Journal

Gets a fixed rate of Intrest whether the


Company makes profit
Normally debentures are security
No voting Rights
Ranks priority with regard repaid

May be of unequal amount


Do not have any distinctive numbers
Only fully paid up shares can be
converted in to stock and cannot be
issued Directly

LEDGER
The ledger is the Book of second entry
Depending upon his conveniences the
trader Records of the transaction in the
ledger
It will never Loose importance as it is
the main book of Accounts which is
relied upon permanently
In the preparation of trial balance and
final A/Cs Ledger is a must
In the finalization of income tax to be
paid, the tax authorities depend on
ledger.

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TRIAL BALANCE
The trial Balance is prepared to check
the arithmetical accuracy of the Books
of Accounts
Trial balance doesnot show the financial
position of business
The trials balance is prepared based on
the Ledger Accounts
The preparation of trial balance is not
compulsory
Trial balance can not be shown as a
documentary evidence

BALANCE SHEET
Balance sheet is prepared to knowledge
true position of Assts and liabilities
particular date
The financial position can be knowledge
from balance sheet
The balance sheet is prepared on the
base of information from trial balance
The preparation of balance sheet is
must
But balance sheet will be accept
documentary evidences by tax
authorities and courts

PROFIT & LOSS ACCOUNT


Objective of preparing P&L A/C to
ascertain the Net profit cost it loss of
the business during the year
Is an account having debit and credit
as such TO and BY are used
recorded in the P & L A/C
Revenue expenditure and Incomes are
accorded in the P & L A/C
Balancing figure of this Account either
net profit or Net loss

BALANCE SHEET
The objective of preparing balance
sheet is to know financial position of the
business on a specific date
Balance sheet is a statement and hence
TO and BY are not used
Capital Incomes and expenditures are
shown in the balance sheet
Balance sheet will not show any
balancing figure. A total of liabilities and
Assets side should always be equal

Fixed Assets:- These assets are acquired for long term use in the business
Liquid assets:- These assets also known as circulating, fluctuating or current
assets can be converted is to cash as early as possible.
Fictitious assets: Fictitious assets are those assets, which do not have physical
Form. They do not have any real value
Ex: loss on issue of shares, preliminary Expences.
Intaugible assets:- Intaugible assets are those having no physical existence and
can not fouch
Ex: Goodwill, Trademarks
Contingent liabilities :- These are not the real liabilities they are not actual
liabilities at present. They right become liability in future on condition that the
contemplated evint
SHARE CERTIFICATE
The holder is a registered member of
the compound
The holder of a share certificate is
essentially a member
For the issue of share certificate may
required approval of the central Govt.
All Companies must issue share
certificates
Share certificate is issued is partly (or)
fully paid shares
Share certificate in not negotiable

SHARE WARRANT
The bearer of a shares warrant is not a
registered member
The bearer of a share warrant can be a
member only if the article so provided
in AOA
Share warrant can be issued central
Govt. approval is must
Share warrants can be only by public
companies
Share warrant can be issued only fully
paid shares
Share warrant is negotiable

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The holder of a share certificate can


present a petition for winding up

The holder of a share warrant can not


present a petition winding up

Bookkeeping :- is complementary to the Accounting process Book keeping is the


systematic recording of financial and Economic transactions.
Accounting is the snalysis and Interpretation of book keeping records.
Realization concept:
Revenues will be Recorded in book only when they are realized
Cash Book:
the cash book is a sub-divisinal of the Book of original entry recording
transactions involving receipts and payments of cash.
All cash transactions are first entered in the cash book and these posted from
cash book in to the ledger
- transactions are recorded chronologically in the cash book
Bill of exchange:Is a instrument in writing containing can un conditional order signed by the laker
PRUDENCE :
Incomes are recognized, when they are realised all possible expences are provide
Realization Concept :
In this concept Assets are recorded at the realization value of Assets and not the
histocal cost basis
So now a days realization convention is not accepted professional According
bodys.
TERM LOANS:
Term loans represents by secured borrowing and at present are the most
important source of finance for new projects
The generally carry a rate of interest these loans are generally repayable over a
period of years in annual , semi annual , quantity installments
Term loans are also provided by banks, state financial institutions and all India
lending institutions
CASH PROFIT
Cash profit is arrived by adjusting the non cash transactions to the net profit
CASH FLOW STATEMENT
Accounting standard 3 explain about this
- this statement shows how much cash is generated and expensed in the
organization during the year , it also opening and closing balance of cash
- it is use full for investors and creditors
- it provides vital(important) information about companies ability to
generate future cash flow to satisfy investors and creditors expectations
Methods of preparing cash flows:- There are two methods
1. Direct method = Gross receipts gross payments
2. indirect method
= net profit
add non cash expenditure
less nosh income (credit sales)
= net cash flow
CLASSIFICATION OF CASH FLOW
- Operating cash flow
- Investing cash flow
- Financing cash flow
CASH: Purchasing power in hand called cash

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CASH EXPENSES
Cash in paid for expenses incurred eg wages paid, salaries paid
NON CASH EXPENSES:- That is cash is not going to out of business
- Eg depreciation, writing off goodwill , patents
- Writing off preliminary expenses
- Discount on issue of shares and debenture
CAPITAL EXPENDITURE
- Expenses incurred of on long term investment
- The benefits will flow or enjoyed by the organization for more than one
year eg plant machinery
- The item dealt is called as issued it is expressed or identified in its own
name eg plant machinery
- Assets is purchased for utilization in the business in the normal course of
business
- Depreciation is to be considered for the life of asset
REVENUE EXPENDITURE
- These expenses shown in the debit side of p&l account
- Expenditure incurred for short term investment
- The benefits for the expenditure will flow or enjoyed by the organization
for the current year only eg salaries
- The item dealt is called goods and merchandise
Plant goods
T v - goods
Goods are purchased with an intention to sell.
There no need of depreciation
COMPANY
- Company cones in to existence only when it is registered under the
companies act
- Membership incase of a company minimum private -2nos public-7nos
maximum private-50 nos, public unlimited
- A company on its incorporation enjoys a separate legal entity
- Incase of company members liability is limited
PARTNER SHIP
- A Firm is created by mutual agreement between partners, registration is
optional
- Membership incase of firm two partners minimum, and maximum banking
business -10 nos , other business 20 nos
- A firm does not have a separate legal entity
- In case of firm partners are jointly & severally liable
COMPANY : A company is a trading association, a company is required to be
registration under the companies act
CLUB: Club is a on trading association, registration of a club is not mandatory
DELECREDORY COMMSSION: It is extra commission paid to bare the bad debts
collection loss
DEMAT ACCOUNT:
- Demat Means the meterilised Account
- It is a separate Account maintained for Investment (shares, securities,
debentures, bonds Extra--- It gives Information about shares bought and sold prices at which shares
were bought and sold. shares presently holding amount held.
I.R.R: (Internal Rate of Return)
This method takes is to consideration time value.
It can be said as discounted Rate of Return
Purchase Consideration:
consideration paid by the transferor company to the share of transfree company.
Economic value Addes :

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A company or business earning profit which is more than cost of capital (Return
Expected by Investors)
Impairment: Permanent decline in value of Asset
A.B.C ANALYSIS:
ABC Analysis is a Method of Inventors control it is popular system of Inventory
control
The item of inventors is generally classified in to three types. Those are ABC
A= is usage value is Maximum and No.of items is Minimum
B= is usage value is medium and no.of itmes is medium
C= is usage value is lowest and no.of itmes is highest.
Annual Report:
Annual Report is a Report
- which will contain the all financial statements of the company and
- auditors Report and performance of Company and
- Auditors opinion of the company
- with previous Reports
Sweat equity shares :
Equity shares issued by the company to employees directors
such issue should be authorized by a special Resolution passed by the company in
general meeting.
Memorandum:
memorandum means memorandum of association as originally framed alter from
time to time is pursuance of any previous company law or of this act.
MEMBER:
- Name entered in the Register of Members
- Member is also a share holder
- Share warrant holder is not a member
SHAREHOLDER
- Name not entered in the Register of members
- Share holder is not a member unless name is entered in the register of
members
- Share warrant holder is share holder
PARTNER
- Partner is one of the owner
- Partnership is governed by partnership act 1932
- Partner has a un limited liability
DIRECTOR
- Director is one of the member of the executive bsodu
- Companies is governed by companies act 1956
- Director is generally not liable
ISSUE OF SHARES AT DISCOUNT
Shares can be issued at a discount, if the following conditions are fulfilled
- the issue of shares at a discount must be by a resolutions passed by the
members at the general meeting
- the issue should be sanctioned by the Company law tribunal
- the resolution authorizing t;h3e issue of shares specified the maximum
rate of discount at which the shares are to be issued
- the rate of discount shall not exceed 10% unless comp any law tribunal
allowed such excess under special circumstances
- the issue can be made only after one year has elapsed since the Company
was entitled to commence business
- the shares shall be issued with in two months of the sanction by the
Company law tribunal or such other period as permitted
SHARES ISSUED AT A PRI CE LESS THAN THE NOMINAL VALUES

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Then it is called shares issued at discount the difference between the issued
price and nominal value is discount on issue of share. It is shown in balance
sheet under head of miscellaneous expenditures no write off
GOODWILL
Is to be Calculated basically on the basis of following methods:
Capitalization Method
Super profit Method
Capitalization Method:
Normal capital employed=future maintainable profits/Normal Rate of Return
Goodwill = normal capital employed-actual closing capital employed
Super profit Method:
Super profit Method=future Maintainable profits-Actual Capital employee X
Normal Rate of Return
Goodwill = super profit X No. of years for which super profit
can be Maintained
capital employed= Total Assets of the Company-out siders liabilities
Goodwill :
It is an Amount paid over and above the value of Assets and liabilities of the
under taking
Goodwill is the Reputation of the business. This reputation is due to Excess
Sales and profit made then normal sales and profit reasons for good will are:
1. good reputation
2. favorable location
3. ability and skill of employees
4. good management extragoodwill is of two types
1. purchased goodwill
2. developed goodwill
purchased goodwill: More Amount paid for Assets than require
Ex: Total Assets 100000
Amount paid 150000
Developed good will : This goodwill not to be written in books
Shares at a premium:
When a Company issues shares at a price higher than the nominal value of
the (Securities) then the difference in the nominal value and the issue price is
the premium.
- The premium may be received in cash or in kind
- But the share premium collected by a Company on issue of shares in
required to be retained in a separate Accounts titled as (security) premium
Account.
Securities premium account can be used only for
1. paying up of fully paid bonus shares to be issued by the Company to its
members
2. To write off preliminary expences
3. to write off underwriting expences /commission paid discount allowed on any
issue of shares or debentures of the Company
4. To provide premium payable by a Company on Redemption of redeemable
shares or Redemption of debentures of the Company.
Distribution of securities premium amount as dividend is not permitted.
Security premium is not a free reserves it is in the nature of capital reserve.
Accounting Concepts:
1) Business entity Concept: In Accounting language business is separate person
is Business entity (and the person who has invested money in that Business or
not the same so the person who is Investing money must be treated as loan
given)
If the invest money in business should be share as capacity.
- the owner of the Business is business it self

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- both business and person investing are two different persons so every person
activities must be written saperately
- Business activities must be written is business books
- person activities must be written is personal books
- capital is shown as liability in B/S. the reason Investing this is business in
lending money from the person investing
- this is also called as SAPERATE LEGAL ENTITY
2) Money measurement concept:
business records only those transactions which are Expressed in money terms.
They will not record transactions if only expressed in other unit of measurement.
3) cost concept: transactions in books are recorded at cost at the actual Amount
Incured market value is not considered
ex: 10 Laks worth land if purchased 1 Lak
we shall record at one laks only.
4) Going concern concept:
- It is assumed but overly business will be running for future seable
- That the business entity desent have any intension to stop an Business activities
in year future
- If we feel that the Business will not run or has to be stop in year foreseeable
future. Then all the things have to recorded at realizable values.
5) Dual Aspct Concept:
- each transaction as two activities
a. power to receive some thing (goods purchased)
b. Duty to pay some thing (duty to pay money)
6) Accrual concept:
not only cash items are recorded in the books but also credit items are to be
recorded.
Cash Accounting system:
Only cash transactions are recorded if the system is following
Matching Principle:
Revenues are matched with relevant expences for getting that revenue in that
period.
- all expences incurred or matched with relevant incomes

Out Standing Expenditure: Expenditure incurred but the payment for which is
not yet paid will be shown in the balance sheet liabilities side and profit and loss
account debited.
Accrued expenses: The expenditure which is incurred and the payment thereof
might or might not be paid.
Working capital: For running day to day activities a business, some capital is
required which is called working capital
Working capital: current assets current liabilities
Excess of total current assets over current liabilities
Working capital cycle/ operating cycle: there is a complete cycle from cash to
cash , Operating cycle is the time duration required to convert cash in to cash
a. conversion of cash in to Raw material
b. conversion of raw material in to work in progress
c. conversion of work in progress in to finished goods
d. conversion of finished goods debtors and
e. conversion of debtors in to cash
No operating cycle: No of days in year / operating cycle period
Stock exchange: stock exchange is the place , where stocks shares and other
securities of the listed companies bought and sold

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Mutual
a.
b.
c.

fund: Mutual fund is fund ,


which collects the investments of small saving holders
and re- Invest in capital market ,
like share market , debt market, It clearly link between small saving
holders and capital markets EX: UTI mutual fund
Debt- Securitization:
a. It is a mode of Financing
b. Where in securities are issued on the basis of package of assets , this
involves the following process of activities
Organizing function
Pooling function
Securitization function
Primary market: Shares are purchased directs at the time of allotment by the
company
Secondary market: Shares are purchased from market through the stock
exchange
Memorandum of association:
a. It is the main document of the company
b. If this document represents constitution of that company
c. It contains
1. name clause
2. Objective clause
3. State clause
4. capital clause
5. liability clause
6. situation clause
Articles of association:
This document represents rules and regulations of the company, it defines duties ,
rights and powers of the governing body between themselves and company
Limited liability: liability is limited to the face value of share
Minority interest: In a subsidiary company , the majority shares is held by holding
company ( say suppose 80% of shares taken by holding company remaining 20%
is held by some other people who are little interested in the company. This little
interest is called as minority interest, these people are called as minority share
holders
Subsidiary company: A company who is selling more than 51% of shares to
another company is called subsidiary company
Holding company: A company who is buying more than 51% of shares from
another company is called holding company
Pubic limited company:
1. minimum members -7
2. maximum members unlimited
3. minimum directors-3
4. After getting business commencement certificate , they can do
business( but not after incorporation)
5. public limited company can go to public issue
private limited company:
1. minimum members -2
2. maximum members 50
3. minimum directors 2
4. can start business after incorporation
5. private limited company shall not issue shares to outsiders
Government company: A government company is a company in which not less
than 51% of the paid up share capital of the company is held by Central
government, state government, partly by the central govt, and partly one or
more

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General Reserve: It is reserve which is created to meet any meet any future
unknown liability , it can be utilized as dividend
Capital reserve: profits in the nature of capital or profits in the form of capital
nature
Reserve capital: reserve capital is called up only at the time of liquidation if assets
held are not sufficient to meat the liabilities
PROVISIONS
- Provisions is charge against profits
- is made for known liability or expenditure
- it is utilized for that purpose only
- is shown above the line
- above the line means profit and loss account
RESERVE
- Reserve in an appropriation profits
- it is made for future unknown liability
- it can be utilized for any future purpose
- is known below the line
- below the line means p&l appropriation account

PRIMARY MARKET
-

Shares are purchased directly at the time of allotment by the company

SECONDARY MARKET
-

Shares are purchased from market through the stock exchange

STOCK EXCHANGE
-

Stock exchange is the place, where stocks shares and other securities of the listed companies
bought and sold

DEBT SECURITAZATION
-

It is a mode of financing
Where in securities are issued on the basis of package of assets called polio
This involves the following process of activities
Organizing function
Pooling function
Securitization function

WORKING CAPITAL
-

For planning day to day activities of a business


Current assets current liabilities , excess of total current assets over current
liabilities

WORKING CAPITL CYCLE/ OPERATING CYCLE


- There is complete cycle from cash to cash
- Conversion of cash in to raw material
- Conversion of raw material in to work in progress
- Conversion of work in progress in to finished goods

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Conversion of finished goods in to debtors and


Conversion of debtors in to cash

No of operating cycle= no of days in a year/operating cycle period

ACCRUED INCOME
Income earned but which not due ( no right to receive on this date) Earned during the current
accounting year but not have been actually received by the end of the same year
OUT STANDING INCOME
Income accrued and due but was not received
DEBTORS
Means taken goods on credit, who owes an amount to some body, People who has taken loan or money
CREDITORS
Means from whom have taken goods on credit people to whom we owes
ACCRUED EXPENSES
The expenditure which is incurred and the payment there of might or might not be paid
PREPAID EXPENDITURE
The amount paid for the expenditure relating to the future years
OUT STANDING EXPENDITURE
The expenditure incurred but the payment for which is not yet paid and will be shown in the balance
sheet liabilities side and debited to profit and loss account
AMORTISATION
Writing of intangible assets eg patents, goodwill this assets there is no physical existence
RECURRING EXPENSES
Items which are repeated eg sales and wages
NON RECURRING EXPENSES
Items which are not regular and repeated eg buying of machinery or other fixed assets, insurance
claims
DELCREDERE COMMISSION
Consignment of goods it is extra commission paid to bare the bad debts collection

STOCK EXCHANGE
Stock exchange is the place where stocks shows and other securities of the listed companies bought and
sold
LIMITED COMPANY

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Liability is limited to the face value of shares
MINORITY INTEREST
In a subsidiary company the majority shares is held by holding company
ACCOUNTING DEFINITION:
Accounting is the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events which are, in part
atleast, of a financial character, and interpreting the result thereof.
SUB-FIELDS OF ACCOUNTING:
1. BOOK-KEEPING: It covers procedural aspects of accounting work and
embraces record keeping function. Obviously book-keeping procedures governed
by the end product, the financial statements, i.e. profit and loss account, and
balance sheet including schedules and notes forming part of accounts.
Profit and Loss account gives result of economic activities for a period and
Balance Sheet states the financial position at the end of the period.
Record keeping also requires suitable classification of transactions and
events. This is also determined with reference to the requirements of financial
statements.
2. FINANCIAL ACCOUNTING: It covers the preparation and interpretation of
financial statements and communication to the users of accounts.
3. MANAGEMENT ACCOUNTING: It covers the generation of accounting
information for management decisions. So it addresses to a single user group, the
management. It includes cost accounting which deals with keeping cost records,
measurement of cost of product/service and cost control methods.
ACCOUNTING EQUATION: EQUITY + LIABILITIES = ASSETS
(or)
EQUITY + LONG TERM LIABILITIES = FIXED
ASSETS +
CURRENT ASSETS CURRENT LIABILITIES.
MEASUREMENT BASES:
There are four generally accepted measurement bases. These are:
i) Historical Cost
ii) Current Cost
iii) Realisable Value
iv) Present Value
HISTORICAL COST: It means acquisition price. Assets are recorded at an
amount of cash or cash equivalent paid or the fair value of consideration given at
the time of acquisition. Liabilities are recorded at the amount of proceeds
received in exchange for the obligation. In some circumstances a liability is
recorded at the amount of cash or cash equivalent expected to be paid to satisfy
it in normal course of business.
CURRENT COST: Assets are recorded at the amount of cash or cash equivalent
that would have to be paid if the same or an equivalent asset was acquired
currently. Liabilities are carried at the discounted amount of cash or cash
equivalents that would be required to settle the obligation currently.

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REALISABLE VALUE: As per realizable value, assets are carried at the amount
of cash or equivalent that could currently be obtained by selling the assets in an
orderly disposal. Haphazard disposal may yield something less. Liabilities are
carried at their settlement values; i.e., the undiscounted amounts of cash or cash
equivalents expressed to be paid to satisfy the liabilities in the normal course of
business.
PRESENT VALUE: As per present value, an asset is carried at the present
discounted value of the future net cash inflows that the item is expected to
generate in the normal course of business. Liabilities are carried at the present
discounted value of future net cash outflows that are expected to be required to
settle the liabilities in the normal course of business.
EX: Mr. X found that he can get Rs.20,00,000/- if he would sell the machine
purchased, on 1-1-82 paying Rs.7,00,000/- and which would cost Rs.25,00,000/in case he would buy it currently.
ACCOUNTING CONCEPTS:
Accounting Concept is generally used to mean a Notion only or mental idea
about something. For example, Cost, Income and Capital, Debit and Credit,
Assets and Liabilities etc., are concepts i.e., basic assumptions or conditions upon
which science of accounting is based. There is no authoritative list of these
concepts. In other words, concept means such ideas which are coupled with
different accounting procedures e.g. Appropriation and Charge, Reserve and
Provisions, Depletion and Amortisation etc. The following are some of the
important generally acceptable concepts: (ICWA)
Accounting is the language of business; affairs of a business unit are
communicated to others as well as to those who own or manage it through
accounting information which has to be suitably recorded, classified, summarized
and presented. To make it full of meaning, accountants have agreed on a number
of concepts which they try to follow. These are given below: (SHUKLA)
BUSINESS ENTITY CONCEPT: Accountants treat a business as distinct from the
persons who own it; then it becomes possible to record transactions of the
business with the proprietor also. Without such a distinction, the affairs of the
firm will be all mixed up with the private affairs of the proprietor and the true
picture of the firm will not be available.
This concept has now been extended to accounting separately for various
division of a firm in order to ascertain the results for each division separately. It
has been of immense value in determining results by each responsibility centre
Responsibility Accounting.
MONEY MEASUREMENT CONCEPT: Accounting records only those transactions
which are expressed in monetary terms, though quantitative records are also
kept. An event, even though important, like a quarrel between the production
manager and the sales manager, will not be recorded unless its monetary effect
can be measured with a fair degree of accuracy. It should be remembered that
money enables various things of divers nature to be added up only through
money values and not otherwise.
COST CONCEPT: Transactions are entered in the books of account at the
amounts actually involved. Suppose a firm purchases a piece of land for Rs.
1,50,000/- but considers it as worth Rs.3,00,000/-. The purchase will be recorded

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at Rs.1,50,000/- and not any more. This is one of the most important concepts
it prevents arbitrary values being put on transactions, chiefly those resulting in
acquisition of assets. Another way of saying the same thing would be that the
amount to be recorded is objectively arrived at as a result of the mutual
agreement of the two parties involved.
Of course, sometimes accountants have necessarily to be satisfied with an
estimate only the amount of depreciation to be charged each year in respect of
machinery is an example; the amount has to be an estimate since the future life
of the machinery cannot be known precisely.
GOING CONCERN CONCEPT: It is assumed that the business will exist for a
long time and transactions are recorded from this point of view. It is this that
necessitates distinction between expenditure that will render benefit over a long
period and that whose benefit will be exhausted quickly, say, within the year, of
course, if it is certain that the concerned venture will exist only for a limited time,
the accounting record will be kept accordingly.
DUAL ASPECT CONCEPT: Each transaction has two aspects, if a business has
acquired an asset, it must have resulted in one of the following:
a) some other asset has been given up; or
b) the obligation to pay for it has arisen; or rather,
c) there has been a profit, leading to an increase in the amount that the
business owes to the
proprietor; or
d) the proprietor has contributed money for the acquisition of the asset.
The reserve is also true. If, for instance, there is an increase in the
money owed to others,
there must have been an increase in assets or a
loss. At any time:
Assets = Liabilities + Capital; or, rather,
Capital = Assets - Liabilities
In other words, capital, i.e., the owners share of the assets of the firm, is
always what is left out of assets after paying off outsiders. This is called the
Accounting Equation. It is self evident but very useful.
REALISATION CONCEPT: Accounting is a historical record of transactions; it
records what has happened. It does not anticipate events though anticipated
adverse effects of events that have already occurred are usually recorded. This is
of great importance in stopping business firms from inflating their profits by
recording sales and incomes that are likely to accrue. Unless money has been
realized either cash has been received or a legal obligation to pay has been
assumed by the customer no sale can be said to have taken place and no profit
or income can be said to have arisen.
ACCRUAL CONCEPT: If an event has occurred or a transaction has been entered
into, its consequences will follow. Normally, all transactions are settled in cash but
even if cash settlement has not yet taken place, it is proper to bring the
transaction or the event concerned into the books. Income or profit arises only
out of business operations when there has been an increase in the owners
share of the assets of the firm (called owners equity) but not if the increase has
resulted from money contributed by the owner himself. Any increase in the
owners equity is called revenue and anything that reduces the owners equity is
expense (or loss); profit results only when the total of revenues exceeds the total
of expenses or losses

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MATCHING CONCEPT: This concept recognizes that the determination of profit
or loss on a particular accounting period is a problem of matching the expired
cost allocated to an activity period. In other words, the expenses which are
actually incurred during a specific activity period, in order to earn the revenue for
the said period, must be matched against the revenue which are realized for that
period. For this purpose, expenses which are specially incurred for earning the
revenue which are realized period are to be considered. In short, all expenses
incurred during the activity period must not be taken. Only relevant cost should
be deducted from the revenue of a period for periodic income statement, i.e., the
expenses that are related to the accounting period shall be considered for the
purpose of matching. This process of relating costs to revenue is called matching
process. It should be remembered that cost of fixed asset is not taken but only
the depreciation on such fixed asset related to the accounting period is taken.
(For the purpose of matching, prepaid expenses are excluded from the total costs
but outstanding expenses are added to the total cost for ascertaining the cost
related to the period). Like costs, all revenues earned during the period are not
taken, but revenue which are related to the accounting period are considered.
Application of matching concept creates some problems which are noted
below:
a) Some special items of expenses, e.g., preliminary expenses, expenses in
connection with the issue of shares and debentures, advertisement expenses etc.,
cannot be easily identified and matched against revenues of a particular period.
b) Another problem is that how much of the capital expenditure should be written
off by way of depreciation for a particular period for matching against revenue
creates the problems of finding out the expected life of the asset. As such,
accurate matching is not possible.
c) In case of long term contracts, usually, amount is not received in proportion to
the work done. As a result, expenditures which are carried forward and not
related to the income received, may create some problems.

CONVENTIONS:
It refers to the general agreement on the usage and practices in social or
economic life, it is a customary practice, rule, method or usage. In other words, it
is an accounting procedure followed by the accounting community on the basis of
long standing customs.
Accounting Conventions can be used as follows:
CONSISTENCY: The accounting practices should remain in the same from one
year to another for instance, it would not be proper to value stock-in-trade
according to one method one year and according to another method next year. If
a change becomes necessary, the change and its effect should be stated clearly.
DISCLOSURE: Apart from legal requirements, good accounting practice also
demands that all significant information should be disclosed. Not only various
assets, for example, have to be stated but also the mode of valuation should be
disclosed. Various types of revenues to be stated but also the mode of valuation
should be disclosed. Whether something should be disclosed or not will depend on
whether it is material or not. Materially depends on the amounts involved in
relation to the asset or transaction group involved or to profits.
CONVERVATISM: Financial Statements are usually drawn up on rather a
conservative basis. Window-dressing, i.e., showing a position better that what it

MADHAV KRISHNA IRRINKI

26

ACCOUNTING MATERIAL FOR INTERVIEWS


is, is not permitted. It is also not proper to show a position substantially worse
than what it is. In other words, secret reserves are not permitted.
MATERIALITY: Materiality means relative importance. In other words, whether a
matter should be disclosed or not in the financial statements depends on its
materiality, i.e., whether it is material or not. American Accounting Association
defines Materiality as under:
An item should be regarded as material if there is reason to believe that
knowledge of it would influence the decision of informed investors.
An accountant cannot ignore the consideration of materiality of
procedures. The term itself is a subjective term. As such, an accountant should
record an item of material even though it is of small amount if the same
influences the decisions of the users, viz. proprietors, auditors, or investors etc.
On the other hand if it is found that an information is not sufficiently important to
influence the quality of periodical financial statements, the same should be
treated as immaterial and hence should be avoided.
It has been stated above that materiality depends on the amounts
involved and the account so affected. As a result, whether a particular item is
material or immaterial depends on the amount and nature of the same. Because,
the material information helps the management to avoid unnecessary wastage of
time and money on principal matters. It should be noted that this doctrine of
materiality refers to separate disclosure of information in the published financial
statements for the user of the same. In short, material items should separately
be disclosed whereas immaterial items may not be disclosed separately but may
be combined in a consolidated form in the published financial statements.
FUNDAMENTAL ACCOUNTING ASSUMPTIONS:
Certain fundamental accounting assumptions underlie the preparation of
financial statements. They are usually not specifically stated because their
acceptance and use are assumed. Disclosure is necessary if they are not followed,
together with the reasons.
The following are recognized by the International Accounting Standards
Committee as fundamental accounting assumptions.:
a) Going Concern: The Enterprise is normally viewed as a going concern,
that is as continuing in operation for the foreseeable future. It is assumed that
the enterprise has neither the intention nor the necessity of liquidation or of
curtaining the scale of its operations.
b) Consistency: It is assumed that accounting policies are consistent with
one period to another.
c) Accrual: Revenues and costs are accrued, that is, recognized as they
are earned or incurred (and not as money is received or paid) and recorded in the
financial statements or the periods to which they relate. (The considerations
affecting the process of matching costs with revenues under the accrual
assumption are not dealt with in this statement).

NOTES TO ACCOUNTS:

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Notes to accounts are the explanation of the management about the items
in the financial statements i.e., profit and loss account and balance sheet. The
management gives more explanation and information about the item of profit and
loss account and the balance sheet and any other items, by way of notes of
accounts
Notes to accounts are integral part of financial statement.
ACCOUNTING STANDARDS:
An Accounting Standard is a selected set of accounting policies or broad
guidelines regarding the principles and methods to be chosen out of several
alternatives. Standards conform to applicable laws, customs, usages and business
environment. So there is no universally acceptable set of standards. In India,
Accounting Standards Board (ASB) has the authority of issuing Accounting
Standards. The sole objective of Accounting Standards is to harmonise the
diversified policies to make the system more useful and effective.
The Council of the ICAI has so far issued twenty eight Accounting
Standards. However, AS-8 on Research & Development is withdrawn consequent
to issue of AS-26 Intangible Assets. These are as follows:

AS
1
2
(Revised)
3
(Revised)
4
(Revised)
5
(Revised)
6
(Revised)
7
(Revised)
8
9
10
11
(Revised)
12
13
14
15

Title of the AS
Disclosure of Accounting Policies
Valuation of Inventories
Cash Flow Statements
Contingencies and Events Occurring
after the Balance Sheet Date
Net Profit or Loss for the period,
Prior Period Items and Changes in
Accounting Policies
Depreciation Accounting
Accounting for Construction
Contracts
Accounting for Research &
Development
Revenue Recognition
Accounting for Fixed Assets
The Effects of Changes in Foreign
Exchange Rates
Accounting
Accounting
Accounting
Accounting

for
for
for
for

Government Grants
Investments
Amalgamations
retirement benefits

Date from which


mandatory
(accounting periods
commencing on or
after)
1-4-1993
1-4-1999
1-4-2001

Enterprises to
which
applicable at
present
All
All
See Note - 2

1-4-1995

All

1-4-1996
All
1-4-1995

--

1-4-2003

All

Withdrawn and included


in AS-26
1-4-1993
1-4-1993
1-4-2004
(Any foreign exchange
transaction
entered
before 1-4-2004 shall be
accounted for as per
Revised AS - 11(2004)
1-4-1994
1-4-1995
1-4-1995
1-4-1995

MADHAV KRISHNA IRRINKI

All
All
All

All

All
All
All
All

28

ACCOUNTING MATERIAL FOR INTERVIEWS

16
17
18
19
20
21
22
23
24
25
26
27

in Financial Statements of
Employers
Borrowing Costs
Segment Reporting
Related Party Disclosures
Leases
Earning Per Share
Consolidated Financial Statements
Accounting for Taxes on Income
Accounting for Investment in
Associates in Consolidated Financial
Statements
Discontinuing Operations
Interim Financial Reporting
Intangible Assets
Financial Reporting of Interest in
Joint Venture

28

Impairment of Asset

29

Provisions, Contingent Liabilities


and Contingent Assets

1-4-2000
1-4-2001
1-4-2001
1-4-2001
1-4-2001
1-4-2001
See Note - 4
1-4-2002

See

See
See
See

All
Note
All
All
Note
Note
Note

-2

-2
-3
-4

All
1-4-2004
1-4-2002
1-4-2003
1-4-2004

All
All
All

1-4-2004
1-4-2005
1-4-2004

See Note - 2
All
All
(with certain
exceptions in
respect of
paragraphs 66
& 67 of the
Standard)

All

NOTE 1: a) Sole Proprietary concerns / Individuals


b) Partnership Firms
c) Societies registered under the Societies Registration Act
d) Trusts
e) Hindu Undivided Family
f) Association of persons
NOTE 2: AS - 3, AS - 17, and AS - 20 have been made mandatory in respect of
following enterprises:
i) Enterprises whose equity or debt securities are listed on a
recognized stock exchange in India, and enterprises that are in the
process of issuing or debt securities that will be listed on a recognized
stock exchange in India as evidenced by the board of directors resolution
in this regard.
ii) All other commercial, industrial and business reporting
enterprising, whose turnover for the accounting period exceeds Rs. 50
Crores.
NOTE 3: AS - 21 is mandatory if an enterprise presents consolidated financial
statements. In other words,
the accounting standard does not mandate an enterprise to present
consolidated financial
statements but, if the enterprise presents consolidated financial
statements for complying with the
requirements of any status or otherwise, it should prepare and present
consolidated financial
statements in accordance with AS - 21.

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NOTE 4: AS - 22 comes into effect in respect of accounting period commencing on
or after 1-4-2001. It is mandatory in nature for:
(a) All the accounting periods commencing on or after 1-4-2001, in
respect of the following:
(i) Enterprise whose equity or debt securities are listed on a
recognized stock exchange in
India and enterprises that are in the process
of issuing equity or debt securities that will be listed
on a recognized stock
exchange in India as evidenced by the board of directors resolution in this
regard.
(ii) All the enterprises of a group, if the parent consolidated
financial statements and the
Accounting Standard is mandatory in nature
of respect of any of the enterprises of that group in
terms of (i) above.
(b) All the accounting periods commencing on or after 1-4-2002, in
respect of companies not
covered by (a) above
(c) All the accounting periods commencing on or after 1-4-2003, in respect
of all other enterprises.
E.O.Q. (Economic Order Quantity):
It is a quality of material that can be occurred at which both ordering costs and
carrying costs are minimum.
E.O.Q.= Root 2AO/C
A= Annual Consumption
O= Ordering Cost per order
C= Carrying Cost per unit per annum
Semi-Variable Cost:
These costs are partly fixed and partly variable, in relation to output.
Ex: Telephone Bill, Electricity Bill.
Angle of Incidence:
When both the cost curve and sales curve cuts or meet at a point that point is
called as Break Even Point.
The angle left after their inter section is called profit angle or angle of incidents.
Sales Curve

Margin of
Safety:
Difference between Total Actual Sales - Break Even Sales
Margin of Safety = Total Sales - B.E.P.
Margin of Safety will be reached faster if angle of incidents is more and vice
versa.
Ex: Total Sales = 30000 ; B.E.P. Sales = 20000
therefore Margin of Safety = 30000 - 20000 = Rs. 10000
Absorption Costing :
Each and every item of cost i.e., variable cost and fixed cost is charged to the
product.
Case 1 :In this case fixed cost are charged to the product on the basis of normal
capacity.
[Normal capacity The number of units normally produced by the company]

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Case 2: in case of under absorption, that amount should be charged to the P&L
A/c
Ex:
Case-1 : Normal units
= 10,000
Actual production
= 12,000
Fixed over heads
= Rs.1,00,000/The absorption rate : fixed over heads = 1,00,000
Normal units
1,0000
= Rs.10/- per unit
And total absorption should be Restricted to Rs.1,00,000/In any case the absorbed amount should not exceed the actual fixed cost.
Case-2 : if the actual production is 8,000 units
The absorption Rate :1,00,000 =Rs.10/- per unit
10,000
The amount absorbed =8000X10 = Rs.80,000
Under absorbed Amount : 1,00,000 - 80,000= Rs.20,000/Which is charged to the Profit and Loss A/c.
Marginal Costing:
This is a technique of Decision Making.
In the case of Marginal Costing only variable cost are absorbed by the product.
In this case the fixed costs are considered as period cost and this should be
charged to P & L A/c.
Costing:
The Process of determining cost is called as costing.
Variable Cost:
1. Cost which is changing with every change in production additionally if you want
to producing one more unit we need to expend additional cost.
Ex: for 10 units Rs.100/for 11th unit additionally Rs.10/2. Cost per unit will not change but there is change in total cost.
Ex: for 10 units Rs.100/Cost per unit = cost/unit =100/10= Rs.10/11 units 110/Cost per unit= 110/11 = Rs.10/Fixed Cost:
1. This cost is fixed will not change with increase or decrease in production.
Ex: Factory rent
2. The total cost will not change but cost per unit will change.
Ex: Rent = Rs.10000/1 person share =Rs.10000/2 persons share= Rs.5000/- each
4 persons share = Rs.2500/- each
P/V Ratio (Profit - Volume Ratio) :
It is a Ratio between Contribution and Sales.
P/V Ratio = Contribution / Sales x 100

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ACCOUNTING MATERIAL FOR INTERVIEWS


Contribution per unit: Selling Price per unit - Variable Cost per unit
Break - Even - Point (B.E.P.):
This is a point at which there is no profit or no loss.
At this point to total amount received is equal to the total cost incurred.
Total Sales amount= Total Cost Amount (Fixed Cost + Variable Cost)
Total Contribution = Total Fixed Cost
Ex: Selling Price = Rs.10/Variable Cost= Rs.5/Fixed Cost= Rs.10000/Contribution= Rs.10-Rs.5 = Rs.5/P/V Ratio = Contribution x 100 = 5/10x100=50%
Sales
B.E.P.Units= Fixed Cost/ Contribution per unit = 10000/5= 2000 units.
B.E.P.Value= Fixed Cost/ PV Ratio = 10000/50x100 = Rs.20000/Statement of Marginal Cost:
Total Sales - Variable Cost = Contribution
Contribution - Fixed Cost = Profit
Current Ratio: Current Assets / Current Liabilities
Current Assets are those which can be converted into cash in the short run.
The term short run means - generally a period of one year.
Current Assets = Inventories + Sundry Debtors + Cash and Bank Balances +
Short Term Loans & Advances +
Marketable Non-Trade Securities + Prepaid Expenses.
Current Liabilities = Cash Credit + Bank O.D. + Short Term Borrowings +
Creditors + Proposed Dividend + Unclaimed
Dividend + Provision for Taxation (Provision for Tax Advance Tax Paid)
Quick Ratio: Quick Assets / Quick Liabilities
Quick Assets = Current Assets - Stock and Prepaid Expenses - Other Liquid
Portion of Current Assets
Quick Liabilities = Current Liabilities Cash Credit, Bank Borrowings and Other
Short Term Borrowings
Debt Equity Ratio: Debt / Equity
Debt = Secured Loan and Unsecured Loan minus Cash Credit and Bank O.D.
Equity = Paid-up Share Capital including Preference Capital and Pre-Reserves
Capital Employed = Net Fixed Assets + Working Capital
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Debt Service Coverage Ratio = Profit after Tax + Interest + Depreciation +
Non-Cash Items
Interest + Debt Installment
Interest Coverage Ratio = Earning Before Interest
Interest
P.E.Ratio (Price Earning Ratio) = Market Price Per Share
Earning Per Share

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Dividend Yield Ratio =


Dividend Per Share
Market Price Per Share
Operating Leverage =

Contribution___________
Earning Before Interest & Tax (EBIT)

Finance Leverage = Earning Before Interest & Tax (EBIT)


Earning Before Tax
Total Leverage = Operating Leverage x Finance Leverage
EPS = Earnings available to Equity Shareholders
No.of Equity Shares outstanding

2
3
4

Memorandum of Association
(MOA)
Memorandum defines the companies
constitution and scope. MOA is the
companies constitution and scope.
It is a primary document.
It is subordinate to the Act.
It is a must for every company.

Strict provisions for alteration.

Ultra virus MOA even all the


members cannot ratify it. (change).

1
2
3
4
5
6
7
8

Shares
Shares are part of the capital of the
company.
Shareholders are members or
owners of the company.
When recommended by the board
dividend could be declared to
shareholders.
Shares do not carry on any charge.
Shares have restrictions issue at a
discount.
Shareholders have voting rights.
Dividend is payable only when
profits are there.
No fixed dividend.

Articles of Association (AOA)


AOA represents Rules and Regulations
of the company.
It is a secondary document.
It is subordinate to MOA and Act.
Can be written or taken from
Companys Act.
Special resolution is sufficient except
where the amendment brings into
effect a private from public.
Ultra virus AOA but intra virus the
MOA can be ratified.

Debentures
Debentures constitute a loan.
Debenture holders are creditors.
Fixed amount of interest on
debentures paid before dividend
declaration.
Debentures generally have a charge
on the asset of the company.
Debentures do not have restrictions
issue at a discount.
Debenture holders do not have voting
rights.
Interest is payable whether profits
are there or not.
Rate of interest is fixed.

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1
2

3
4
5

1
2
3
4
5
6

1
2
3
4

6
7

1
2

Shareholder
One of the owner of the company
and has proprietary interest in the
company.
When the company makes profits
and the board recommends,
shareholder gets a share in the
profits.
No security for his investment.
Eligible for voting rights.
On liquidation, shareholders are paid
last.

Debenture holder
Only a creditor of the company

Shares
Has a nominal value.
May be fully paid or partly paid.
Can be transferred in whole numbers
and not in fractions.
Each and every share shall be of
equal denominations.
Shares are identified with distance
numbers.
Can be issued directly to the public.

Stock
No nominal value.
Always fully paid.
Can be transferred in fractions also.

Capital expenditure
Expenditure for the purchase and
installation of asset.
These assets are shown at the
assets side of the balance sheet
Expenses are incurred for long term
investment.
The benefits will flow or enjoyed by
the organization for more than one
year.
Ex: plant and machinery
The item dealt is called as asset. It
is expressed or identified in its own
name.
Plant Plant ; T.V. T.V.
Asset is purchased for utilization in
the business, in the normal course
of business.
Depreciation is to be considered for
the life of asset.

Revenue expenditure
Expenditure incurred for the
maintenance of asset.
These expenses are shown in the
debit side of profit and loss account.
Expenditure incurred for short term
investment.
The benefits for the expenditure will
flow or enjoyed by the organization
for the current year only.
Ex: salaries, printing & stationary etc.
The item dealt is called goods or
merchandise.
Plant Goods ; T.V. Goods.

Profit and Loss Account


Objective of preparing P & L Account
to ascertain the net profit or loss of
the business during the year.
In this account having debit and

Balance Sheet
The objective of the preparing Balance
Sheet is to know the financial position
of the business on a specific date.
Balance Sheet is a statement and

Get a fixed rate of interest whether


the company makes profit or not.
Normally debentures are secured.
No voting rights.
Ranks priority with regard repayment.

May be unequal amounts.


Do not have any distinctive numbers.
Only fully paid up shares can be
converted in to stock and cannot be
issued directly.

Goods are purchased with an intention


to sell.
There is no need of depreciation.

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34

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3
4

1
2
3
4
5

1
2
3
4
5

credit as such To and By are


used
Revenue expenditure and incomes
are recorded in the Profit and Loss
Account.
Balancing figure of this account
either net profit or net loss.

hence To and By are not used.

Recurring Expenses
Items which are repeated.
Ex: Salaries & Wages

Non-Recurring Expenses
Items Which Are Not Regular And
Repeated.
Ex: Buying of Machinery or Other
Fixed Assets, Legal Expenses, Loss or
Profit on sale of Asset, Insurance
Claims.

Public Limited Company


Minimum number of members are 7.
Maximum number of members are
unlimited.
Minimum directors are 3.
After getting business
commencement certificate they can
do business.
Public Limited Company can go for
public issue.

Private Limited Company


Minimum number of members are 2.
Maximum number of members are 50.

Provision
Provision is a charge against the
profits.
Is made for known liability or
expenditure.
It is utilized for that purpose only.

Reserve
Reserve is an appropriation on profits.

Is shown above the line.


Above the line means Profit and Loss
Account.

Capital incomes and expenditures are


shown in the Balance Sheet.
Balance Sheet will not show any
balancing figure. A total of Liabilities
and Assets side should always be
equal.

Minimum directors are 2.


Can start business after incorporation.
Private Limited Company shall not
issue its shares to outsiders.

It is made for future unknown liability.


It can be utilized for any future
purpose.
Is shown below the line.
Below the line means Profit and Loss
Appropriation Account.

Partnership
It is a going concern.
It always has a name.
Persons carrying on business are
called partners.
Profits are ascertained at regular
intervals, i.e., annually.

Joint Venture
It is a terminable venture.
It may not bear a name.
Persons carrying on business are
called Co-venturers.
The profits are ascertained for each
venture separately cash basis of
accounting is followed.

Deposit
Deposits are amounts, received by
the company from the public.

Deposits are short term or middle

Debenture
Debenture is a document, which
acknowledge debt, which is issued by
company
Debentures are long term financial

1
2
3
4

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35

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3
4

1
2
3

1
2
3

1
2

3
4

1
2

1
2
3

term financial sources.


Deposits are unsecured.
It is easy to rise public deposits.

sources.
Debentures are generally secured.
Issue of debentures restricted by RBI.

Member
Name entered in the register of
members.
Member is also a share holder.

Share holder
Name not entered in the register on
members.
Share holder is not a member unless
name is entered in the register of
members.
Share warrant holder is share holder.

Share warrant holder is not a


member.

Partner
Partner is one of the owner.
Partnership is governed by
Partnership Act, 1932.
Partner is a unlimited liability.

Director
Director is one of the member of the
executive body.
Companies is governed by the
Companies Act, 1956.
Director is generally not liable.

Company
Company comes into existence only
when it is registered under the
companies act.
Members:
minimum
Private : 2 Members
Public : 7 Members
Maximum
Private : 50
Public : un limit.
A company on its incorporation
enjoys a separate legal entity.
In case of company members
liability is limited.

Partnership
A firm is created by mutual agreement
between partners. Registration is
optional.
Members:
Minimum
2 Partners.
Maximum
In case of Banking Business : 10
In case of Other Business : 20.

Company
A company is a trading association.
A company is required to be
registered under the companies act.

Club
Club is a non trading association.
Registration of a club is not
mandatory.

Trial Balance
The Trial Balance is prepared to
check the arithmetical accuracy of
the books of accounts.
Trail Balance does not show the
financial position of business.
The Trial Balance is prepared based
on the ledger accounts.

Balance Sheet
Balance Sheet is prepared to know the
true position of assets and liabilities
on a particular date.
The financial position can be known
from balance sheet.
The Balance Sheet is prepared on the
basis of information from Trial
Balance.

A firm does not have separate legal


entity.
In case of firm, partners are jointly or
severably liable.

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36

ACCOUNTING MATERIAL FOR INTERVIEWS

4
5

1
2

1
2
3
4
5
6
7

1
2
3

1
2
3
4

The preparation of Trial Balance is


not compulsory.
Trial Balance cannot be shown as a
documentary evidence.

The preparation of Balance Sheet is


must.
Balance Sheet will be accepted as
documentary evidences by tax
authorities and courts.

Forfeiture of Shares
Forfeiture is proceeding against
reluctant shareholder. ( defaulted in
call payment)
Forfeiture can be done only partly
paid up shares.

Surrender of Shares
Surrender is affected with the assent
of share holder.

Share Certificate
The holder is a registered member of
the company.
The holder of a share certificate is
essentially a member.

Share Warrant
The bearer of a share warrant is not a
registered member.
The bearer of a share warrant can be
a member only if the article so
provided in and as.
Share warrant can be issued Central
Govt. approval is must.

For the issue of share certificate may


not required approval of the Central
Government.
All companies must issue share
certificates.
Share certificate is issued is partly or
fully paid shares.
Share certificate is not negotiable.
The holder of a share certificate can
present a petition for winding up.

Surrender can be done only fully paid


up shares.

Share warrant can be issued only by


public companies.
Share warrant can be issued only fully
paid shares.
Share warrant is negotiable.
The holder of a share warrant cannot
present a petition for winding up.

Promissory Note
In promissory note there is a
promise to pay..
In promissory note there are two
parties, namely, the maker and the
payee.
A promissory note is signed by the
person liable to pay. So no
acceptance is needed.

Bill of Exchange
In a bill there is an order to pay.

Journal
Journal is the book of first or original
entry. It is also called the book of
first entry or primary entry.
Transaction in the journal will be
recorded immediately.

Ledger
The ledger is the book of second
entry.

When once the entries are posted in


to ledger, the journal losses its
importance.
In the preparation of final accounts
journal in not useful.

In a bill there are three parties,


namely, drawee, drawer, and payee.
A bill has to be accepted by the
drawee before he can be held liable.

Depending upon his conveniences the


trader records the transaction in the
ledger.
It will never lose importance as it is
the main book of accounts which is
relied upon permanently.
In the preparation of trial balance and
final accounts ledger is a must.

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37

ACCOUNTING MATERIAL FOR INTERVIEWS

The tax authorities generally may


not depend on journal.

In the finalization of income tax to be


paid, the tax authorities depend on
ledger.

Book-keeping : is complement to the accounting process. Book-keeping is the


systematic recording of financial and economic transactions.
Accounting: is the analysis and interpretation of Book-keeping records.
Cash Book : The Cash Book is a sub division of the original entry recording
transactions involving receipts and payments of cash. All cash transactions are
first entered in the cash book and then posted from cash book in to the ledger.
Transactions are recorded chronologically in the cash book.
Bill of Exchange : is a instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of money
only to, or to the order of a certain person or to the bearer of the instrument.
Prudence: Incomes are recognized when they are realized, all possible expenses
are provide.
Term Loans : Term Loans represents secured borrowing and at present are the
most important source of finance for new projects. They generally carry a rate of
interest. These loans are generally repayable over a period of 6 to 10 years in
annual, semi annual, or quarterly in installments. Term loans are also provided by
banks, state financial institutions and all India term lending institutions.
Cash Profit: Cash is arrived by adjusting the non-cash transactions to the net
profit after tax.
Net profit after tax
xxxx
Add: Non-cash expenses
xxx
xxxx
Add: Depreciation
xxx
xxxx
Less: Non-cash incomes(credit sales)
xxx
Cash Profit
xxxx
Cash Flow Statement:
Accounting Standard 3 explains about this.
The statement shows how much cash is generated and expended in
the organization during the year. It also shows opening and closing
balance of cash.
It is use full for investors and creditors.
It provides vital (important) information about companies ability to
generate future cash flow to satisfy investors and creditors
expectations.
Methods in preparing cash flows:
There are two methods, these are a) Direct Method, and b) Indirect Method.
In Direct Method : Gross Receipts Gross Payments = Net Cash Flow
In Indirect Method : Net Profit + Non-cash Expenditure Non-cash Incomes
(Credit Sales) = Net Cash Flow.
Classification of Cash Flows :
i) Operating Cash Flow
ii) Investing Cash Flow

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iii) Financing Cash Flow
Cash : The purchasing power in hand is called cash.
Cash Expenses : Cash is paid for expenses incurred. Ex: Salaries, Wages paid
etc.
Non-cash Expenses : it is an expenditure, there is no cash involvement.
Expenses are incurred but cash is not paid ( that is cash is not going out of the
business)
Ex: depreciation writing off, goodwill, patents, writing off preliminary expenses,
discount on issue of shares and debentures, loss on revaluation of assets and
liabilities etc., in this cases income is reduced since tax saving is effected.
Amalgamation : Involves merger of two existing companies or a company
takeover the another company.
Absorption : A company take over another company. Amalgamation includes
absorption.
Fixed Assets : These assets are acquired for long term use in the business.
Liquid Assets : These assets also known as circulating, fluctuating, or current
assets. These assets can be converted in to cash as early as possible.
Fictitious Assets : Fictitious assets are those assets, which do not have physical
form. They do not have any real value.
Ex: loss on issue of shares, preliminary expenses etc.
Intangible Assets : Intangible assets are those having no physical existence
and cannot touch.
Ex: Goodwill, Patents, and Trademarks etc.
Contingent Liabilities : These are not the real liabilities. They are not actual
liabilities at present. They right become a liability in respect of pending. This is
not shown in balance sheet. That may be shown as notes under balance sheet.
Del-credre Commission : It is extra commission paid to bear the bad debts
collection loss.
Demat Account : Demat means the materialized account. It is a separate
account maintained for investments (Shares, Securities, Debentures, Bonds etc.).
It gives information about shares sought and sold, prices at which shares were
bought and sold, shares presently holding and amount held.
IRR (Internal Rate of Return) : This method takes in to consideration time
value. It can be said as discounted rate of return.
Purchase Consideration : Consideration paid by the transferor company to the
shareholders of Transferee Company.
Economic Value Added : A company or business earning profit which is more
than cost of capital (Return expected by Investors).
Impairment : Permanent decline in value of asset.

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ABC Analysis : ABC Analysis is a method of inventory control. It is popular
system of inventory control. The item of inventory is generally classified in to
three types. These are:
A : Usage value is Maximum and number of items is Minimum.
B : Usage value is Medium and number of items is also Medium.
C : Usage value is Lowest and number of items is Highest.
Annual Report : Annual Report is a report, which will contain the all financial
statements of the company and auditors report and main opinions on
performance of company. It is useful with previous reports.
Sweat Equity Shares : means equity shares issued by the company to
employees, directors. Such issue should be authorized by a special resolution
passed by the company in general meeting.
Memorandum : means MOA as originally framed or altered from time to time in
pursuance of any previous company law or of this act.
Issue of Share at a Discount : Shares can be issued at a discount, if the
following conditions are fulfilled.
The issue of shares at a discount must be a resolution passed by the
members at the general meeting.
The issue should be sanctioned by the company law tribunal.
The resolution authorizing the issue of shares specified the maximum
rate of discount at which the shares are to be issued.
The rate of discount shall not exceed 10%. Unless company law
tribunal allowed such excess under special circumstances.
The issue can be made only after one year. One year has elapsed since
the company was entitled to commence business.
The shares shall be issued with in two months of the sanction by the
company law tribunal or such other period as permitted.
Shares issued at a price less than the nominal value : Then it is called
shares issued at discount. The difference between the issued price and nominal
value is discount on issue of share. It is shown in balance sheet under the head of
miscellaneous expenditure not written off.
Shares issued at Premium: When a company issues shares at a price higher
than the nominal value of the share (securities) then the difference in the nominal
value and the issue price is the premium.
The premium may be received in cash or in kind.
But the share premium collected by a company on issue of shares is
required to be retained in a separate accounts titled as share
(securities) premium account.
Securities premium account can be used only for
paying up of fully paid bonus shares to be issued by the
company to its members.
To write off preliminary expenses.
To write off underwriting expenses / commission paid discount
allowed on any issue of shares or debentures of the company.
To provide premium payable by a company on redemption of
debentures of the company.
Distribution of securities premium amount as dividend is not
permitted.
Security premium is not a free reserves. It is in the nature of
capital reserve.

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Portfolio Management : Classification of assets get aims at minimizing the total


risk while taking the maximum returns is called portfolio management. It refers
to diversification of assets which means not keeping all eggs in the same basket.
Good will : It is an amount paid over and above the value of assets and liabilities
of the under taking.
Goodwill is the reputation of the business. This reputation is due to excess sales
and profit made then normal sales and profit.
Reasons for goodwill are:
Good reputation
Favourable location
Ability and skill of employees
Good management.
Goodwill is of two types, these are i) Purchased Goodwill and ii) Developed
Goodwill
Purchased goodwill: more amounts paid for assets than required
Ex: Total Assets = 100000
Amount Paid= 150000
Developed Goodwill: This goodwill not be written in books.
Goodwill is to be calculated basically on the basis of following methods,
i) Capitalization method and ii) Super Profit Method
Capitalization Method:
Normal Capital Employed = Future Maintainable Profits
Normal Rate of Return
Goodwill = Normal Capital Employed Actual closing capital employed
Super Profit Method:
Super Profit = Future Maintainable Profits Actual Capital Employed x
Normal Rate of Return.
Goodwill = Super Profit x No. of years for which super profit can be
maintained.
Capital Employed = Total Assets of the Company Outsiders Liabilities.
Annual Report : Annual Report contains Balance Sheet, Profit and Loss Account
and Notes to accounts of the company during the last year.
Notes to Accounts : it gives the information on the following aspects,
i) Accounting policies with respect to
Fixed assets and depreciation
Research and development expenditure
Foreign exchange transactions
Excise duty
Interim / proposed dividend
Investments
Miscellaneous expenditure
We are downloaded more than 12W Companys annual report from their web sites
and internet. Then we can access more than 600 files.
Cash Accounting System : Only cash transactions are recorded if the system is
followed.

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Mercantile Accounting System : Both cash transactions and credit transactions
are recorded in this system. If cash transactions are incurred first they are
recorded first. If credit transactions are incurred first they are recorded first. In
simple to say what ever is incurred first will be recorded first.
Discount : Discounts are two types. These are i) Trade Discount and ii) Cash
Discount
Trade Discount : It is deducted from list price or catalogue price or tag. It is
generally allowed by whole seller to retailer. Trade Discount are not recorded in
books.
Ex: Tag Price = Rs. 100
- Trade Discount = Rs. 10
Rs. 90 This amount is recorded in the books.
Purchase A/c Dr 90
To Cash A/c 90
Cash Discount : This discount is given to debtors to make them pay debts as
early as possible.
Ex: Immediately - 5%, within 15 days 4%, within one month 2% etc. Cash
discount is given for early or prompt payment. Cash discount are recorded in
books.
Purchase A/c Dr 100
To Cash
90
To Discount
10

Substance over form :Information is to be present in accordance with their


substance and not nearly their legal from.
Ex: Rights and benefits in Plant and Machinery, Transferred but registration is
pending. It means the expenses before starting of the production or company or
for extension of existing undertaking.
Preliminary expenditure : is an expenditure incurred for setting or
undertaking.
Ex: i) for drafting legal documents (MOA and AOA) Legal Documents
ii) Fees for registration of the company
iii) Underwriting Commission
iv) Brokerage and Charges for drafting, printing, typing and advertising the
prospectus.
Deferred Revenue Expenses : The benefit of the expenditure will be differed to
the future periods for which the expenditure is charges. Differed revenue
expenditure is known as asset in balance sheet.
Ex: Preliminary expenses, Advertisement expenses
Deferred Revenue Income : which is income differed to the future periods.
That means it is not related to one period but related to more than one period.
Ex: Pension Fund Scheme
Capital Reserve : Amounts received on capital items.
Revenue Receipts : Amount receive on revenue items. Amount received by sale
of goods or services show the trading and profit and loss account credit side.

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Capital Profits : Capital profits are profits realized on sale of fixed assets or on
discount of investments. They may be distributed by way of dividend.
Revenue Profits : Revenue profits are the profits earned by the company
through its ordinary activities.
Debenture : Debenture is a document bearing the company common seal. Which
creates or acknowledges a debt. It need not be secured (It may be secured or It
may not be secured). It does not carry any voting rights, but it carries interest.
Dividend : Dividend is a return on the investment to the share holders. It is paid
out of the divisible profits of the company. Dividend is normally expressed in
terms of percentage of the face value of the share.
Types of Dividend : Dividend is 3 types. These are,
i) Dividend of Preference Shares, ii) Dividend on Equity Shares and, iii) Interim
Dividend.
General Reserve : General Reserve is a Reserve which is created to meet any
future unknown liability. It can be utilized as dividend.
Capital Reserve : Profits in the nature of capital or profits in the form of capital
nature.
Ex: Share Premium, Share Forfeiture.
Reserve Capital : Reserve Capital is called up only at the time of liquidation if
assets held are not sufficient to meet the liabilities.
Subsidiary Company : A company who is selling more than 51% of their shares
to another company is called subsidiary company.
Holding Company : A company who is buying more than 51% of shares from
another company, is called holding company. A company shall be deemed to be a
subsidiary of another company, if that other company,
Controls the composition of its Board of Directors.
Holds more than 50% of the voting power or paid up capital in the
other company.
Is the subsidiary any other company, which is the subsidiary of holding
company.
Government Company : A Government Company is a company in which not
less than 51% of the paid up share capital of the company is held by Central
Government, or State Government, or partly by the by the Central Government
and partly by one or more State Governments.
Memorandum of Association : It is the main document of the company. This
document represents constitution of that company. It contains i) Name Clause, ii)
Objective Clause, iii) State Clause, iv) Capital Clause, v) Liability Clause, and vi)
Situation Clause.
Articles of Association : This document represents rules and regulations of the
company. It defines duties, rights, and regulations of the company between
themselves and company.
Limited Liability : Liability is limited to the face value of the share.

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Minority Interest : In a Subsidiary Company, the majority shareholding is held
by holding company (say 60% or 80% or so, the remaining 40% or 20% is held
by sum other people who are little interested in the company. This little interest is
called as minority interest). These people are called as minority shareholders.
Stock Exchange : Stock Exchange is the place, where stocks, shares and other
securities of the listed companies bought and sold.
Mutual Fund : Mutual Fund is a fund, which collects the investments of small
saving holders and re-invest in capital markets, like share market, debt market. It
creates link between small saving holders and capital markets. Ex: U.T.I. Mutual
Funds.
Debt Securitization : It is a mode of financing, where in securities are issued on
the basis of package of assets (called pooled). This involves the following process
of activities:
Organizing function
Pooling function
Securitization function
Primary Market : Shares are purchased directly at the time of allotment by the
company.
Secondary Market : Shares are purchased from market through the stock
exchange.
Working Capital : For running day to day activities of a business, same capital is
required which is called working capital.
Working Capital = Current Assets Current Liabilities or,
Excess of Total Current Assets over Current Liabilities.
Working Cycle or Operating Cycle : There is a complete operating cycle is the time
duration required to convert cash in to cash cycle from cash to cash
Conversion of cash into raw material
Conversion of raw material into work in progress
Conversion of work in progress into finished goods
Conversion of finished goods into debtors and
Conversion of debtors into cash
No. of Operating Cycle = No. of Days in a year/Operating Cycle Period
Objective of Working Capital Management : Optimum Investment in current
assets reducing current liabilities.
Working Capital Management : Decisions are to be taken for effective
financing of current assets required for day to day running of the organization.
Working Capital Management refers to the procedures and policies required to
manage the working capital.
Accrued Interest :The accrued interest is to be added to the concerned income
in the credit side of the profit and loss account. The accrued interest is to be
shown as an asset, Asset side of Balance Sheet
Accrued Interest A/c Dr
Interest A/c

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Accrued Income : means income earned, but which is not due (no right to
receive on this date). Earned during the current accounting year but have not
been actually received by the end of the same year.
Ex: Interest on loan, Commission etc.
Outstanding Income : Income accrued and due but was not receive.
Debtors : means taken goods on credit. People who owes us i.e. people who has
taken loan or money.
Creditors : means from whom have taken goods on credit people to whom we
owes i.e., these people have lent money to us or given money to us.
Out Standing Salary : Salaries A/c Dr
To Out Standing Salaries A/c
Prepaid Salary : Prepaid Salary A/c Dr
To Salary A/c
Bad Debts : Debts which are bad.
Bad Debts A/c Dr
To Debtors A/c
Provision for Bad Debts : Profit and Loss A/c Dr
To Provision for Bad and Doubtful Debts
Accrued Expenses : The expenditure which is incurred and the payment there
of might or might not be paid.
Prepaid Expenses :Prepaid expenses are to be deducted from such expenses in
the debit side of profit and loss account. Shown as an asset in the assets side of
Balance Sheet. The amount paid for the expenditure relating to the future years.
Out Standing Expenditure : Expenditure incurred but the payment for which is
not yet paid and will be shown in the balance sheet liabilities side, debited to
profit and loss account
Amortization : Writing off Intangible Asset
Ex: Patents, Good will, for this asset there is no physical existence.
Del credre Commission : It is extra commission paid to bear to the bad debts
collection.
Depreciation : Accounting Standard 6 deals with depreciation.
It is charge for the use of assets in the operation,
It may arise due to usage time or change of technology.
Two methods are normally followed for charging the depreciation i)
Written Down Method, and ii) Straight Line Method
The rates of depreciation have been specified in Schedule XIV to the
Companies Act, 1956.
It is mandatory for the companies to charge depreciation
Depreciation cannot be charged on land.
Due to fluctuation in foreign exchange, if the value of asset increases,
then depreciation should be charged on the increased value of the
asset.

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Written Down Value : Every year depreciation is changing. Year by year it goes
on decreasing. Depreciation is calculated on the opening balance of this year.
Straight Line Method : Every year depreciation is same
Ex: Total Value/Its Life
(Note: In any method the total amount of asset must be depreciated is 95%).
Annuity Method : Interest is taken care or Interest is added and depreciation is
found.
Depreciation Fund Method: Every year depreciation amount is invested in
investments. Interest on investments receive in also invested. All this investments
are sold, when new assets is to be purchased.
Depletion Method : This method is use in mines, quarries. The total quantity of
tones are estimated. Depreciation per tone is now calculated.
Cost per tone = Total Cost / Estimated Tones
Capital Budgeting : Analyzing and selection of investment projects whose
returns are expected to extend beyond one year.
Net Present Value : It is the difference between inflows and outflows.
IRR : The rate which present value of inflows are equal to present value of
outflows.
PI: also called as benefit cost ratio. It shows relationship between present value
of inflow and present value of outflows. i.e. inflows / outflows.
Capital Structure : It refers to the proportion of debt equity and preference
capital.
Beta : Market Risk Systematic Risk
Stand Demat : Industry Risk Unsystematic Risk
Portfolio Management : means group of securities.
ADVANCED FINANCIAL ACCOUNTING
Funds Flow Statement:
A statement that uses net working capital as a measure of liquidity position is
referred to as funds flow statement.To go to the roots, this funds flow
statement was termed where got and where gone statement. This statement
records the increases and decreases in different items of the balance sheet. Later
it was called funds statement. In 1963 Accounting Principles Board (APB) changed
the name of the statement as statement of sources and applications of funds.
Uses and importance of Funds Flow Statement:
An essential too for the financial analysis and management.
Reveals the changes in the working capital and gives the details of the
sources from which working capital has been financed.
Helps in the analysis of the financial operations and explains causes
for the changes on the liquidity position of the company.

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Helps in dividend distribution and the formulation of an ideal dividend
policy.
Helps in making correct decisions in planning and development of the
company.
Concept of Sources and uses of Funds:
An increase in non-current liabilities or a decrease in non-current
assets of the firm is considered as source of funds.
An increase in the non-current assets and a decrease in the noncurrent liabilities is a use of funds.
A decrease in net working capital during the accounting period, is
considered to be a source of funds.
An increase on net working capital during the accounting period is
considered to be a use of funds.
Net Working Capital = Current Assets Current Liabilities
Funds: The term funds means working capital i.e., the excess of current assets
over current liabilities.
Flow of Funds: The term flow means movement and includes both Inflow and
Outflow.
Ratio Analysis: It is the relationship between two financial values. To make it
clear the word relationship stands for a financial ratio which is the result of two
mathematical values.
Gross Profit Ratio = Gross Profit / Sales x 100
This ratio tells us the result from trading Activity (from Buying and Selling). To
know the Operating Efficiency of the Organisation.
Net Profit Ratio = Net Profit / Sales x 100
It indicates the final result to organization and overall efficiency of the
organization.
Operating Profit Ratio = Operating Profit / Sales x 100
This ratio speaks of the operational performance of the organization and refer the
managerial efficiency of the firm.
Earning per Share = Equity Shareholders / No. of Equity Shareholders
It reveals the profit available to ordinary shareholders.
Dividend Yield Ratio = Dividend per Share / Market Value per Share
It is very significant to the new investors.
Dividend per Ratio = Dividend Payable / No. of Ordinary Shares.
It indicates the amount of dividend to be paid to ordinary shareholders.
Return on Investment = Return / Investment x 100
Cost of Goods Sold Ratio = Cost of Goods Sold / Sales x 100
Cost of Goods Sold = Opening Stock +Purchases + Wages Closing Stock
Operating Exp. Ratio = Operating Exp. / Sales x 100

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Operating Expenses = (Office Administrative Exp. + Selling & Distribution Exp.
+ Financial Exp.)
Office & Administration Exp. Ratio = Office & Admn. Exp. / Sales x 100
Selling & Distribution Exp. Ratio = Selling & Distribution Exp. / Sales x 100
Financial Exp. Ratio = Financial Exp. / Sales x 100
Above five ratios make us know the relationship between various expenses and
sales.
The lower the ratio the greater is the profitability, and higher the ratio the lower is
the profitability
Operating Ratio = Cost of Goods Sold + Operating Expenses / Sales x 100
Operating Ratio tells us the efficiency of the conduct of business operation. A high
ratio means the operating expenses are high and margin is less. Therefore the
lower is the ratio the higher is the position.
Non-Operating Expenses Ratio = Non Operating Expenses / Sales x 100
Current Ratio = Current Assets / Current Liabilities
This ratio explains whether the firm is able to meet short term obligations or not.
The higher ratio is an indication of the soundness of the organization.
Current Assets = Cash in Hand + Cash at Bank + Sundry Debtors + Bills
Receivable + Stock + Prepaid Exp. + Short term investment etc.
Current Liabilities = Sundry Creditors + Bills Payables + Overdraft +
Outstanding Expenses.
The current ratio tells us the ability of the firm to meet its short term obligation.
Liquidity Ratio = Liquid Assets / Current Liabilities
Liquid Assets = Current Assets Stock
The liquid ratio is very helpful in measuring liquidity position and firms capacity to
pay off short term obligation. The liquid ratio is a measure of liquidity.
Absolute Liquidity Ratio = Liquid Assets Debtors / Liquid Liabilities
Liquidity Liabilities = Current Liabilities Bank Overdraft
It gives a more meaningful measure of liquidity. The satisfactory ratio will be 1 : 1
i.e., Rs.1 worth of absolute liquid assets are sufficient for Rs.1 worth of current
liabilities.
Fixed Assets to Proprietors Funds = Fixed Assets / Proprietors Funds
This ratio establishes the relationship between the fixed assets and proprietors
funds. Proprietors funds also indicates the general financial strength of a firm.
Total Assets to Proprietary Funds = Total Assets / Proprietary Funds
Current Assets to Proprietor Funds = Total
Funds

Current Assets / Proprietary

Capital Gearing Ratio = Equity Share Capital / Fixed Interest - Bearing


Securities
Debt Equity Ratio = Debt or External Equities / Equity or Internal Equities
It is one of the important structural ratios and establishes relationship between
debt capital and equity capital. Debt capital is a cheaper source of finance. This

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ratio helps us in assessing the risk factor that arises in the use of debt capital in
capital structure.

Stock Turnover Ratio = Cost of Goods Sold / Average Stock


It reveals the movement of stock in the organization. If the no. of times is more it
indicates the fast movement of stock. If the no. is less it indicates slow movement
of stock in the organization.
Debtors Turnover Ratio = Credit Sales / Average Debtors & Bills Receivable
This ratio gives a picture of how many times debtors made payments to the firm.
Creditors Turnover Ratio = Credit Purchases / Average Creditors & Bills
Payable
This ratio focuses light on how many times credit facility is allow to the firm. The
lower the ratio the higher the facility of credit.
Working Capital Turnover Ratio = Sales (or) Cost of Sales / Working Capital
To know the relationship between working capital and sales.
Fixed Assets Turnover Ratio = Sales (or) Cost of Sales / Fixed Assets
To know the effective utilization of fixed assets in production.
Total Assets Turnover Ratio = Sales / Capital Employed
To test the managerial efficiency and business performance. This ratio measures
how efficiently assets are employed overall.
Ratio: The relationship between two financial values.
Gross Profit: Sales Cost of Goods Sold
Equity: Proprietary Funds
Debt: Long term and short term liabilities
Operating exp.: The aggregate of office and administrative expenses, selling &
distribution and financial expenses.
Financial Leverage: The use of fixed rate of sources along with owners equity is
described as financial leverage.
Amalgamation : When two or more companies carrying one similar business
taken over by a newly formed company for the progress in business, it is called
amalgamation.
Absorption : It one or more companies are taken over by a company already in
existence, it is called absorption.
Reconstruction : It means reorganization of companys financial structure.
Purchase Consideration : Purchase consideration means the purchase price
agreed upon, which is paid by the purchasing company inorder to pay to the
Vendor Company.
Lump sum Method : Lump sum amount is paid to Vendor.

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HOLDING COMPANIES:
It is obvious that Holding Companies can nominate the majority of
directors in other companies which are known as subsidiary companies and
therefore a holding company usually holds the majority of paid up equity share
capital. When a company reaches the stage of floating another company holding
majority of shares, it becomes a parent company. The existing companies in order
to avoid competition float a company which holds a majority of their shares.
Sec. 4 of the Companies Act, 1956 defines a Holding Company and
Subsidiary Company by their relation to each other. A company shall be deemed
to be a subsidiary of another if, but only if,
The other company controls the composition of its Board of Directors;
or
The other company a) holds more than half of the nominal value of its
equity capital, or b) if it is an existing company (i.e., a company
formed before 1st April 1956) with both equity and preference
shareholders, having equal voting rights, the other company controls
more than half of the total voting power; or
It is a subsidiary of any company which is the other companys
subsidiary.
To make it clear a company is termed to be the holding company of
another only when the other is its subsidiary. Therefore a holding company is one
which has control over one or more other companies. It is to be noted that there
is no liquidation of subsidiary company. Moreover, its separate legal entity cannot
be disturbed. The point is only acquisition of shares in the subsidiary company
but not its assets or liabilities. Preparing consolidated Balance Sheet is common.
Goodwill or Capital Reserve: When the Holding Company purchases the shares
of subsidiary company by paying more than face value, the excess paid is treated
as Goodwill. When the holding company purchases shares from the subsidiary
company, less than the face value, the difference between face value and the
amount paid is treated as capital reserve.
Capital Profits: The profits and reserve in the subsidiary company on the date of
shares acquired by the holding company is treated as capital profits.
Revenue Profits: Profits earned by subsidiary company after acquiring the
shares by holding company are called Revenue Profits.
Minority Share Holders Interest: The amount related subsidiary company is
treated as minority shareholders interest.
Contingent Liabilities: Contingent Liability is a liability which may or may not
arise.
Inter company Transactions: Transactions between the holding company and
the subsidiary company are known as inter company transactions.
VALUATION OF SHARES:
Net Assets Method: In this method valuation of shares is based on asset
valuation.
Net Tangible Assets: (Assets - Liabilities) - Intangible Assets
Yield Method: This is also known as earning capacity or Market Value Method.
Investors in general and small investors in particular pay for the shares on the
basis of the income or yield expected. Therefore, the expected dividends are
taken as the basis in this method.

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Fair Value Method: this is also called earning capacity valuation method or dual
method. This is geared to rectify one of the limitations of the earlier method that
the value of the share is based on the dividend but not on the earnings. This
method relates the value of the share to the earning efficiency in terms of
profitability of the company as the market price of the share is based on the
earnings of the company rather than the dividend declared.
Intrinsic value: Means the potential price of a companys common stock.
Liquidation: Winding up of the company.
Net Worth: Means the sum of paid up share capital plus reserves plus the
preference share capital.
VALUATION OF GOODWILL:
Goodwill is the reputation and image built up which places the business in
position to have long run survival, success and growth, success and growth
besides positively influencing the earnings.
Factors affecting goodwill: Profitability of Business, Brand Equity, Product of
Service Quality, Customer Acceptance, Business Location and Access etc.
Average Method: In this method which takes into account the average profits
for the past few years and the value of goodwill is calculating as some years
purchase of this amount.
Super Profit Method: The excess of actual profits over the normal profit is
known as super profit. A business unit may posses some advantages which
enable it to earn extra profits over and above the amount that would be normally
earned, if the same capital is employed elsewhere in a business of same risk
class.
Annuity Method: Under this method goodwill is calculated by taking the average
super profit as the value of an annuity over a certain number of years. An annuity
is a series of equal periodic payments occurring at equal intervals of time. In
other words goodwill is calculated by finding the present value of an annuity
discounted at a given rate of interest which is usually the normal rate of return.
Value Added Statements: The Statements which show changes in value added
which are created by production.
Historical Cost Accounting: The accounting statements which are prepared on
the basis of past transactions.
Inflation Adjusted Statements: Accounting statements are adjusted on the
basis of established price index.
Replacement Cost: It is the cost of replacing an existing employee.
Opportunity Cost: The actual or assumed rate for capitalization of the
differential earnings expected to be earned by an employee.
Annuity: A series of receipts or payments of a fixed amount for a specialized
number of years.

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Present Value: The value of sums received in future being discounted by an
appropriate capitalization rate.

FINANCIAL MANAGEMENT
Financial Management: Concerns the acquisition, financing, and management
of assets with some overall goal.
Future Value: The value at some future time of a present amount of money, or a
series of payment, evaluated at a given interest rate.
Net Present Value: The Present Value of an investment projects net cash flows
minus the projects initial cash outflow.
Present Value: The current value of a future amount of money, or a series of
payments, evaluated at a given interest rate.
Price / Earning Ratio: The market price per share of a firms common stock
divided by the most recent 12 months of earnings per share.
Risk: The variability of returns from those that are expected.
Capital Structure: The mix of a firms permanent long - term financing
represented by debt, professed stock, and common stock equity.
Compound Interest: Interest paid on any previous interest earned, as well as
on the principal borrowed.
Funds: Funds include not only cash but also the total current assets or financial
resources.
Profit Maximisation: It is a criterion for economic efficiency as profits provide a
yard stick by which economic performances can be judged under condition of
perfect competition.
Wealth Maximisation: It stands that the management should seek to maximize
the present value of the expected returns of the firm.
Discounting: A reduction of some further amount of money to a present value at
some appropriate rate in accordance with the concept of the time value of money.
Sole Proprietorship: A sole proprietorship is a firm owned by an individual. He
owns all assets and owes all liabilities of the business.
Partnership Firm: A partnership firm is a business unit carried on by two or
more persons with an intention to share profits or losses. The limitations are i)
Unlimited liability ii) Limited life iii) difficulty in transferring ownership and iv)
Limitations in raising funds.
Joint Stock Company: A joint stock company is a legal entity created under the
law and empowered to own assets, to incur liabilities, and to engage in business.
It is an artificial person created by the law. The capital of a company is divided

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into small portions and each portion is called a share. Investors who buy these
share are shareholders and they are the owners of the company.
Co-operatives: Cooperative societies are associations formed voluntarily by the
people to render service to the members of their society. They are formed to
protect and safeguard the economic interest of the weaker sections of the society
from the exploitation of stronger sections of the society.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)


The SEBI Act, 1992 was promulgated after withdrawing the Capital Issues
(Control) Act. SEBI is broad in its application covering wide ranging issues. The
powers and functions of SEBI Act are:
Regulating the business of stock exchanges
Registering and regulating the working of Stock Brokers, Sub Brokers,
Share Transfer Agents, Bankers to the Issue, Trustees of Trust Deeds,
Registrars to an issue, Merchant Bankers, Underwriters, Portfolio
Mangers, Investment Advisors.
Registering and regulating the working of Depositors, Custodians of
Securities, Credit Rating Agencies
Registering and regulating the working of Venture Capital Fund,
Collective Investment Schemes, Mutual Funds
Promoting self regulating organizations.
Prohibiting fraudulent and unfair trade practices
Promoting investors education
Prohibiting insider trading
Regulating substantial acquisition of shares, takeover of companies.

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