FINANCE

BUZZWORDS
Course 1 Edition
 The process of recording, classifying and summarising financial transactions

Accounting over a particular period pertaining to a business.

Accounting equation is a mathematical expression which shows that the assets

and liabilities of a firm are equal.

Accounting Equation Assets= External Liabilities + Owner’s Funds

Period for which financial transactions are to be recorded and reported. Usually
Acounting Period covers a span of twelve months.

Accounting Period
States that an income statement should be prepared at periodic intervals (say,

quarterly) for purposes such as performance evaluation and determination of

Concept taxes.

Requires that expenses/revenue incurred/accrued for a particular accounting

period should be reckoned in the same period, irrespective of the fact whether
Accrual Basis actual cash has been exchanged or not.

Process of writing down the value of an intangible asset (say, goodwill and

Amortisation patents).

Appreciation Increase in monetary value of assets (say, revaluation of land and building).

Asset Assets are valuable resources owned by a business.

 Bad debt is an amount owed to the business that is written off because it has

become irrecoverable. It is a loss for the business and thus debited to profit and
Bad Debt loss.

A financial statement that provides information about the resources (assets)

Balance Sheet and obligations (liabilities) of a firm at a particular point in time.

Bank Balance Cash held in the bank account of a person or a firm.

Acknowledgement of debt, issued against a credit sale, with a promise of

Bills Receivable payment at a particular point in time.

Accumulated wealth available for investment.

Capital

Investment Investment expenditure (having a life of more than one year) undertaken to

Expenditure generate future revenues.

A reserve created by the capital profit is known as capital reserve. It is created

Capital Reserve out of the profits earned from transactions of capital nature and is not

available for the distribution of shareholders as dividends

Cash and Cash

Includes bank balance, cheque, draft, cash in hand, treasury bills and other

short-term highly liquid investments (having a maturity of up to 3 months).

Equivalents
 Process of recognising only those transactions that involve actual exchange of
Cash Basis cash.

Involves actual cash outlay. For example, rent, salary, etc.

Cash Expense

Cash Flow Statement A record of sources of cash inflows and uses of cash outflows of a firm during an

(CFS) accounting period (classified into operating, financing and investment activities).

Cash Loss When cash outflows are more than cash inflows from business activities.

In operational terms, cash profit implies that as long as a firm has funds from

business operations, the normal functioning of a business enterprise may not be

Cash Profit severely affected.

Closing stock is the amount of unsold stock lying with the firm on a particular
Closing Stock date.

Conservative
As the name suggests, conservative concept warrants the use of conservatism

in business records. With respect to income statements, the principle is

Concept ‘anticipate no profits unless realised but provide for all probable future losses’.

The consistency principle requires that there should be a consistency of

Consistency Principle accounting treatment of items (say depreciation method used with respect to

plant and machinery) in all accounting periods.

 Contingent liabilities are liabilities that may be incurred by the firm owing to an

uncertain future event. These liabilities are classified as: claims against the
Contingent Liabilities company that are not acknowledged as debt, guarantees, any other amount of

money for which the company is contingently liable.

Assets/resources owned by a firm are shown at their acquisition cost and not at

Cost Concept their current market value/current worth.

It is rare that all the finished goods purchased during one accounting year are sold

in the same year. It is for this reason that, out of total goods available for sale
Cost of Goods Sold (Opening Stock + Purchases), closing stock of finished goods is deducted to

(COGS) determine the cost of goods sold. Thus, Cost of goods sold = Opening stock +

Purchases – Closing stock.)

A creditor is a person to whom an enterprise owes an amount against credit

Creditors purchases of goods and services taken.

In contrast to long-term assets, current assets are short-term in nature. They

represent cash/bank balances and other assets that are expected to be

Current Assets converted into cash, in the normal course of business, within one year or normal

operating cycle of the business, whichever is longer.

AIn contrast to long-term liabilities, current liabilities (also known as short-term

liabilities) are short-term obligations payable to outsiders within one year from

Current Liabilities the date of their inception/origin/incurrence. For example, sundry creditors,

short-term bank credit, accrued expenses, dividends payable and so on.

Debenture It is an example of a specific reserve. As the name suggests, specific reserves

Redemption Fund can be utilised only for the specific purposes for which they are created.

A long-term security instrument used by firms to borrow money at a fixed rate of

Debentures interest.
 A debtor or debitor is a legal entity (legal person) that owes debt to another

entity (say, due to purchase of goods on credit). The entity may be an individual,
Debtors a firm, a government, a company or another legal person.

They are also known as fictitious assets. These are the category of assets that

Deferred Revenue
have not been fully written off till the date of B/S, such as advertisement

expenditure, preliminary expenses and accumulated loss. Clearly, they are not
Expenditure real assets.

Depreciation is a non-cash expense item. It is a yearly charge on account of use of

Depreciation tangible assets. The payment for such assets has already been made in the previous

years (when such assets were purchased).

Wages paid to the workers engaged in production are referred to as direct

Direct Labour Cost labor cost.

A dividend is a distribution of profits by a corporation to its shareholders.

Dividends

In operational terms, it implies that every business transaction has two-fold

effects (known as principle of duality/double entry). This implies that the

Duality balance sheet must always tally, unless a mistake has been committed by the

accountant.

Effective share capital of the corporate firm is evidently equal to share capital

minus loss (shown on asset side). For some of the sick units and loss-incurring

Effective Share public sector firms, you should not be surprised to find their effective share

Capital capital as negative (or much lower than that shown by share capital), implying

that all the capital has been eaten up by the losses. In case of profit-making

companies, effective share capital is share capital plus accumulated profit.

Equity capital is provided by equity capital-holders, who are the residual/last

claimants in the assets of a firm (therefore, aptly referred to as ‘risk capital’).

Equity Capital Apart from this, there is no fixed rate of dividend payable to them.
 Expenses are payments made in return of any goods or services. Expenses are

classified into two categories: (i) expenses required to be paid in cash, which
Expenses may be termed as ‘cash expenses’ and (ii) expenses not requiring cash

expenditure (referred to as ‘non-cash expenses’).

Comprises the contribution made by creditors and lenders towards financing

External Liabilities the assets of a firm.

These assets have not been fully written off till the date of B/S, such as

Fictitious Assets advertisement expenditure, preliminary expenses and accumulated loss. Clearly,

they are not real assets.

Financing activities primarily include cash flows obtained through share capital

Financing Activities and long-term borrowings, cash repayments of amounts borrowed and

payments (interests and dividends) to providers of funds.

A flow refers to the total value of transactions (sales or purchases, incomes or

Flow Concept expenditures) during an accounting period.

Funds imply working capital (WC) and WC, in turn, is equivalent to the
Funds difference between current assets (CA) and current liabilities (CL).

This concept implies that the firm will continue to operate in the foreseeable

Going Concern
future. The operational implication of this assumption is that assets are not

shown in the balance sheet at their realisable market value. Instead, valuation
Concept of assets is with reference to the value of the goods/services they are likely to

be produced/rendered in future years to come.

Gross Profit It is the difference between the sales revenue and cost of goods sold.
 Income
Statement/Profit and P&L A/c (also known as income statement) reports the results of the operations

Loss Account/P&L of a firm in terms of net income/profit during a specified period of time.

A/C

An Intangible Asset does not have physical existence. These assets include

Intangible Asset patents, trade-marks, copyrights, licenses, franchises and goodwill.

It comprises owners’ contribution/equity, which is equal to capital plus accumulated

Internal Liabilities profits.

Inventories are current assets. They include raw materials, work-in-progress,

Inventories finished goods, stock-in-trade and so on.

Cash flows that represent investment activities encompass capital expenditures

(purchase of long-term assets/investments that have been incurred to generate

Investment Activities future revenues, income and cash flows). It also includes the sale of fixed

assets.

Lenders A person or an organisation that lends money.

Liabilities payable, as the name suggests, are the sources from where finances
Liabilites have been raised. For example, equity, long-term borrowings, debentures, etc.

Liquidity Liquidity implies availability of liquid assets or cash to operate a

firm/organisation.
 As the name suggests, such assets are acquired to be used in business for

Long-Term/Fixed relatively longer periods to produce goods and/or render services. In other

Assets words, they are not ordinarily meant for resale in the normal course of business.

For example, plants, machinery, buildings and so on.

Manufacturing account is prepared to determine the cost of goods

Manufacturing manufactured. It is equivalent to the sum of three major cost constituents: (i)

Account cost of materials consumed, (ii) direct labor cost and (iii) other

factory/manufacturing expenses.

Marketable Securities that are expected to be converted readily into cash at a short notice,

Securities virtually without any loss (say, treasury bills).

Accounting records only those facts about a business firm that can be

Money Measurement expressed in monetary terms. In other words, the business events and facts that

Concept cannot be expressed in monetary amounts (however important they may be) are

excluded.

Net profit represents ‘true’ earnings (after adjusting all expenses and payment

Net Profit of taxes) that are available to the shareholders.

Expenses that do not require current cash expenditure are referred to as ‘non-
Non-Cash Expense cash expenses’. For example, depreciation, amortisation, etc.

It is the amount of goods/materials available with the firm for sales or further
Opening Stock use at the beginning of the accounting period.

Cash flows from operating activities are primarily derived from the principle

Operating Activities revenue, that is, producing activities of the enterprise. Therefore, they generally

result from the transactions and other events that are used to determine net

profit or loss.
 It refers to the earnings from business operations only. It is equivalent to

Operating Profit Earnings Before Interest and Taxes (EBIT) minus non-operating incomes such as

dividend/interest received.

Owners'
Owners’ contributions, also known as equities, are internal liabilities. It

comprises owners’ contribution and retained earnings.

Contribution/Equity

They are also known as preference stocks. They are the shares of the company with

Preference Shares dividends paid to the shareholders before common stock dividends are issued. In

case of liquidation, their money is refunded prior to equity owners.

Corporate firms normally have a convention of appropriating (setting aside)

Profit and Loss
part of profits to build up reserves (that is, to strengthen the financial position
Appropriation of a business firm internally) and part of profits to meet future-specific needs

Account (say, payment of debentures, replacement of plant and machinery and so on).

These are financial expenses that are specifically set aside to pay a company’s
Provision for Tax income tax.

Another name for assets is resources.

Resources

Retained earnings are profits that have been accumulated over the years from
Retained Earnings the net profits of the firm.

Revaluation Reserve Gain on revaluation of long-term assets. It is a kind of capital reserve.

 Revenue reserves represent profits/retention accumulated over the years from

Revenue Reserve the profits of normal business operations. For example, general reserve and

dividend equalisation reserve.

As the name suggests, they represent borrowings of the corporate firm against

which specific assets/securities have been provided in terms of mortgage or

Secured Loans hypothecation. The two major examples of secured loans are debentures and

loans from financial institutions and commercial banks.

For accounting purposes, a company/business firm is considered as an entity that is

separate from its owners/promoters as per the Principle of Separate Entity. This
Separate Entity principle requires that every business transaction must be viewed only from the

perspective of the firm and not from the point of view of its owners.

Shareholders' fund is the fund belonging to the shareholders of the company.

They consist of share capital, reserves, and surplus, and preference share
Shareholders' Funds capital.

It is another name for liabilities. Finances are raised from sources.

Sources

Specific Reserves
Specific reserves can be utilised only for the specified purposes for which they
and General are created. General reserves are available to be used for any purpose.

Reserves

Total sum payable to all creditors (suppliers of goods on credit) to whom the
Sundry Creditors company owes money to.

Sundry debtors represent the amount that all customers owe to the firm due to
Sundry Debtors sale of goods on credit to them.
 Surplus represents the balance left in P&L appropriation A/c after making
Surplus provisions for various general and specific reserves and payment of dividend.

A tangible asset exists physically. For example, land, buildings, plant and

Tangible Asset machinery, office equipment and furniture.

Unsecured loans represent borrowings of the firm against which no specific security

has been provided. The major constituents of unsecured loans are: (i) public

Unsecured Loans deposits, (ii) inter-corporate borrowings, (iii) loans and advances from promoters

and (iv) unsecured loans from banks and financial institutions (not necessary to be

secured).

WC is the difference between Current Assets (Gross Working Capital) and

Working Capital Current Liabilities.