Accounting basics and interview questions answers

ACCOUNTING BASICS AND INTERVIEW QUESTIONS
ANSWERS
ACCOUNTING BASICS AND INTERVIEW QUESTIONS ANSWERS
1. Definition of accounting: “the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at least of a financial
character and interpreting the results there of”.
2. Book keeping: It is mainly concerned with recording of financial data relating to the business
operations in a significant and orderly manner.
3. Concepts of accounting:
A. Separate entity concept
B. Going concern concept
C. Money measurement concept
D. Cost concept
E. Dual aspect concept
F. Accounting period concept
G. Periodic matching of costs and revenue concept
H. Realization concept.
4 Conventions of accounting:
A. Conservatism
B. Full disclosure
C. Consistency
D. Materiality
5. Systems of book keeping:
A. single entry system
B. double entry system
6. Systems of accounting:
A. Cash system accounting
B. Mercantile system of accounting.
7. Principles of accounting:
A. Personal a/c: Debit the receiver
Credit the giver
B. Real a/c: Debit what comes in
Credit what goes out
C. Nominal a/c: Debit all expenses and losses
Credit all gains and incomes
8. Meaning of journal: Journal means chronological record of transactions.
9. Meaning of ledger: Ledger is a set of accounts. It contains all accounts of the business
enterprise whether real, nominal, personal.

10. Posting: It means transferring the debit and credit items from the journal to their
respective accounts in the ledger.
11. Trial balance: Trial balance is a statement containing the various ledger balances on a
particular date.
12. Credit note: The customer when returns the goods get credit for the value of the goods
returned. A credit note is sent to him intimating that his a/c has been credited with the value of the
goods returned.
13. Debit note: When the goods are returned to the supplier, a debit note is sent to him
indicating that his a/c has been debited with the amount mentioned in the debit note.
14. Contra entry: Which accounting entry is recorded on both the debit and credit side of
the cashbook is known as the contra entry.
15. Petty cash book: Petty cash is maintained by business to record petty cash expenses of
the business, such as postage, cartage, stationery, etc.
16. Promisory note: an instrument in writing containing an unconditional undertaking
signed by the maker, to pay certain sum of money only to or to the order of a certain person or to the
barer of the instrument.
17. Cheque: A bill of exchange drawn on a specified banker and payable on demand.
18. Stale Cheque: A stale cheque means not valid of cheque that means more than six
months the cheque is not valid.
20. Bank reconciliation statement: It is a statement reconciling the balance as shown by the
bank passbook and the balance as shown by the Cash Book. Obj: to know the difference & pass
necessary correcting, adjusting entries in the books.
21. Matching concept: Matching means requires proper matching of expense with the
revenue.
22. Capital income: The term capital income means an income which does not grow out of
or pertain to the running of the business proper.
23. Revenue income: The income, which arises out of and in the course of the regular
business transactions of a concern.
24. Capital expenditure: It means an expenditure which has been incurred for the purpose
of obtaining a long term advantage for the business.
25. Revenue expenditure: An expenditure that incurred in the course of regular business
transactions of a concern.
26. Differed revenue expenditure: An expenditure, which is incurred during an accounting
period but is applicable further periods also. Eg: heavy advertisement.
27. Bad debts: Bad debts denote the amount lost from debtors to whom the goods were sold
on credit.
28. Depreciation: Depreciation denotes gradually and permanent decrease in the value of
asset due to wear and tear, technology changes, laps of time and accident.
29. Fictitious assets: These are assets not represented by tangible possession or property.
Examples of preliminary expenses, discount on issue of shares, debit balance in the profit And loss
account when shown on the assets side in the balance sheet.
30. Intanglbe Assets: Intangible assets mean the assets which is not having the physical
appearance. And it’s have the real value, it shown on the assets side of the balance sheet.
31. Accrued Income: Accrued income means income which has been earned by the business
during the accounting year but which has not yet been due and, therefore, has not been received.
32. Outstanding Income: Outstanding Income means income which has become due during
the accounting year but which has not so far been received by the firm.

33. Suspense account: The suspense account is an account to which the difference in the
trial balance has been put temporarily.
34. Depletion: It implies removal of an available but not replaceable source, Such as
extracting coal from a coal mine.
35. Amortization: The process of writing of intangible assets is term as amortization.
36. Dilapidations: The term dilapidations to damage done to a building or other property
during tenancy.
37. Capital employed: The term capital employed means sum of total long term funds
employed in the business. i.e.
(Share capital+ reserves & surplus +long term loans – (non business assets + fictitious
assets)
38. Equity shares: Those shares which are not having pref. rights are called equity shares.
39. Pref.shares: Those shares which are carrying the pref.rights are called pref. shares
Pref.rights in respect of fixed dividend. Pref.right to repayment of capital in the event of company
winding up.
40. Leverage: It is a force applied at a particular work to get the desired result.
41. Operating leverage: the operating leverage takes place when a changes in revenue
greater changes in EBIT.
42. Financial leverage: it is nothing but a process of using debt capital to increase the rate of
return on equity
43. Combine leverage: It is used to measure of the total risk of the firm = operating risk +
financial risk.
44. Joint venture: A joint venture is an association of two or more the persons who
combined for the execution of a specific transaction and divide the profit or loss their of an agreed
ratio.
45. Partnership: Partnership is the relation b/w the persons who have agreed to share the
profits of business carried on by all or any of them acting for all.
46. Factoring: It is an arrangement under which a firm (called borrower) receives advances
against its receivables, from financial institutions (called factor)
47. Capital reserve: The reserve which transferred from the capital gains is called capital
reserve.
48. General reserve: the reserve which is transferred from normal profits of the firm is
called general reserve
49. Free Cash: The cash not for any specific purpose free from any encumbrance like
surplus cash.
50. Minority Interest: Minority interest refers to the equity of the minority shareholders in a
subsidiary company.
51. Capital receipts: Capital receipts may be defined as “non-recurring receipts from the
owner of the business or lender of the money crating a liability to either of them.
52. Revenue receipts: Revenue receipts may defined as “A recurring receipts against sale of
goods in the normal course of business and which generally the result of the trading activities”.
53. Meaning of Company: A company is an association of many persons who contribute
money or money’s worth to common stock and employs it for a common purpose. The common
stock so contributed is denoted in money and is the capital of the company.
54. Types of a company:
1. Statutory companies
2. Government company

3. Foreign company
4. Registered companies:
A. Companies limited by shares
B. Companies limited by guarantee
C. Unlimited companies
D. private company
E. public company
55. Private company: A private co. is which by its AOA: Restricts the right of the members
to transfer of shares Limits the no. Of members 50. Prohibits any Invitation to the public to subscribe
for its shares or debentures.
56. Public company: A company, the articles of association of which does not contain the
requisite restrictions to make it a private limited company, is called a public company.
57. Characteristics of a company:
> Voluntary association
> Separate legal entity
> Free transfer of shares
> Limited liability
> Common seal
> Perpetual existence.
58. Formation of company:
> Promotion
> Incorporation
> Commencement of business
59. Equity share capital: The total sum of equity shares is called equity share capital.
60. Authorized share capital: It is the maximum amount of the share capital, which a
company can raise for the time being.
61. Issued capital: It is that part of the authorized capital, which has been allotted to the
public for subscriptions.
62. Subscribed capital: it is the part of the issued capital, which has been allotted to the
public
63. Called up capital: It has been portion of the subscribed capital which has been called up
by the company.
64. Paid up capital: It is the portion of the called up capital against which payment has been
received.
65. Debentures: Debenture is a certificate issued by a company under its seal acknowledging
a debt due by it to its holder.
66. Cash profit: cash profit is the profit it is occurred from the cash sales.
67. Deemed public Ltd. Company: A private company is a subsidiary company to public
company it satisfies the following terms/conditions Sec 3(1)3:
1. Having minimum share capital 5 lakhs
2. Accepting investments from the public
3. No restriction of the transferable of shares
4. No restriction of no. of members.
5. Accepting deposits from the investors

68. Secret reserves: Secret reserves are reserves the existence of which does not appear on
the face of balance sheet. In such a situation, net assets position of the business is stronger than that
disclosed by the balance sheet.
These reserves are created by:
1. Excessive depot an asset, excessive over-valuation of a liability.
2. Complete elimination of an asset, or under valuation of an asset.
69. Provision: provision usually means any amount written off or retained by way of
providing depreciation, renewals or diminutions in the value of assets or retained by way of
providing for any known liability of which the amount cannot be determined with substantial
accuracy.
70. Reserve: The provision in excess of the amount considered necessary for the purpose it
was originally made is also considered as reserve Provision is charge against profits while reserves is
an appropriation of profits Creation of reserve increase proprietor’s fund while creation of provisions
decreases his funds in the business.
71. Reserve fund: The term reserve fund means such reserve against which clearly
investment etc.,
72. Undisclosed reserves: Sometimes a reserve is created but its identity is merged with
some other a/c or group of accounts so that the existence of the reserve is not known such reserve is
called an undisclosed reserve.
73. Finance management: Financial management deals with procurement of funds and their
effective utilization in business.
74. Objectives of financial management: financial management having two objectives that
Is:
1. Profit maximization: The finance manager has to make his decisions in a manner so that
the profits of the concern are maximized.
2. Wealth maximization: Wealth maximization means the objective of a firm should be to
maximize its value or wealth, or value of a firm is represented by the market price of its common
stock.
75. Functions of financial manager:
> Investment decision
> Dividend decision
> Finance decision
> Cash management decisions
> Performance evaluation
> Market impact analysis
76. Time value of money: The time value of money means that worth of a rupee received
today is different from the worth of a rupee to be received in future.
77. Capital structure: It refers to the mix of sources from where the long-term funds
required in a business may be raised; in other words, it refers to the proportion of debt, preference
capital and equity capital.
78. Optimum capital structure: Capital structure is optimum when the firm has a
combination of equity and debt so that the wealth of the firm is maximum.
79. Wacc: It denotes weighted average cost of capital. It is defined as the overall cost of
capital computed by reference to the proportion of each component of capital as weights.

80. Financial break-even point: It denotes the level at which a firm’s EBIT is just sufficient
to cover interest and preference dividend.
81. Capital budgeting: Capital budgeting involves the process of decision making with
regard to investment in fixed assets. Or decision making with regard to investment of money in
longterm projects.
82. Payback period: Payback period represents the time period required for complete
recovery of the initial investment in the project.
83. ARR: Accounting or average rates of return means the average annual yield on the
project.
84. NPV: The Net present value of an investment proposal is defined as the sum of the
present values of all future cash inflows less the sum of the present values of all cash out flows
associated with the proposal.
85. Profitability index: Where different investment proposal each involving different initial
investments and cash inflows are to be compared.
86. IRR: Internal rate of return is the rate at which the sum total of discounted cash inflows
equals the discounted cash out flow.
87. Treasury management: It means it is defined as the efficient management of liquidity
and financial risk in business.
88. Concentration banking: It means identify locations or places where customers are
placed and open a local bank a/c in each of these locations and open local collection canter.
89. Marketable securities: Surplus cash can be invested in short term instruments in order to
earn interest.
90. Ageing schedule: In an ageing schedule the receivables are classified according to their
age.
91. Maximum permissible bank finance (MPBF): It is the maximum amount that banks
can lend a borrower towards his working capital requirements.
92. Commercial paper: A cp is a short term promissory note issued by a company,
negotiable by endorsement and delivery, issued at a discount on face value as may be determined by
the issuing company.
93. Bridge finance: It refers to the loans taken by the company normally from commercial
banks for a short period pending disbursement of loans sanctioned by the financial institutions.
94. Venture capital: It refers to the financing of high-risk ventures promoted by new
qualified ntrepreneurs who require funds to give shape to their ideas.
95. Debt securitization: It is a mode of financing, where in securities are issued on the basis
of a package of assets (called asset pool).
96. Lease financing: Leasing is a contract where one party (owner) purchases assets and
permits its views by another party (lessee) over a specified period
97. Trade Credit: It represents credit granted by suppliers of goods, in the normal course of
business.
98. Over draft: Under this facility a fixed limit is granted within which the borrower allowed
to overdraw from his account.
99. Cash credit: It is an arrangement under which a customer is allowed an advance up to
certain limit against credit granted by bank.
100. Clean overdraft: It refers to an advance by way of overdraft facility, but not back by
any tangible security.

101. Share capital: The sum total of the nominal value of the shares of a company is called
share capital.
102. Funds flow statement: It is the statement deals with the financial resources for running
business activities. It explains how the funds obtained and how they used.
103. Sources of funds: There are two sources of funds internal sources and external sources.
Internal source: Funds from operations is the only internal sources of funds and some important
points add to it they do not result in the outflow of funds
(a) Depreciation on fixed assets
(b) Preliminary expenses or goodwill written off, Loss on sale of fixed assets Deduct the
following items, as they do not increase the funds:
Profit on sale of fixed assets, profit on revaluation Of fixed assets
External sources: (a) Funds from long-term loans
(b)Sale of fixed assets
(c) Funds from increase in share capital
104. Application of funds: (a) Purchase of fixed assets (b) Payment of dividend (c)Payment
of tax liability (d) Payment of fixed liability
105. ICD (Inter corporate deposits): Companies can borrow funds for a short period. For
example 6 months or less from another company which have surplus liquidity? Such deposits made
by one company in another company are called ICD.
106. Certificate of deposits: The CD is a document of title similar to a fixed deposit receipt
issued by banks there is no prescribed interest rate on such CDs it is based on the prevailing market
conditions.
107. Public deposits: It is very important source of short term and medium term finance. The
company can accept PD from members of the public and shareholders. It has the maturity period of 6
months to 3 years.
108. Euro issues: The euro issues means that the issue is listed on a European stock
Exchange. The subscription can come from any part of the world except India.
109. GDR (Global depository receipts): A depository receipt is basically a negotiable
certificate, dominated in us dollars that represents a non-US company publicly traded in local
currency equity shares.
110. ADR (American depository receipts): Depository receipts issued by a company in the
USA are known as ADRs. Such receipts are to be issued in accordance with the provisions stipulated
by the securities Exchange commission (SEC) of USA like SEBI in India.
111. Commercial banks: Commercial banks extend foreign currency loans for international
operations, just like rupee loans. The banks also provided overdraft.
112. Development banks: It offers long-term and medium term loans including foreign
currency loans
113. International agencies: International agencies like the IFC,IBRD,ADB,IMF etc.
provide indirect assistance for obtaining foreign currency.
114. Seed capital assistance: The seed capital assistance scheme is desired by the IDBI for
professionally or technically qualified entrepreneurs and persons possessing relevantexperience and
skills and entrepreneur traits.

115. Unsecured loans: It constitutes a significant part of long-term finance available to an
enterprise.
116. Cash flow statement: It is a statement depicting change in cash position from one
period to another.
117. Sources of cash:
Internal sources
(a)Depreciation
(b)Amortization
(c)Loss on sale of fixed assets
(d)Gains from sale of fixed assets
(e) Creation of reserves
External sources-
(a)Issue of new shares
(b)Raising long term loans
(c)Short-term borrowings
(d)Sale of fixed assets, investments
118. Application of cash:
(a) Purchase of fixed assets
(b) Payment of long-term loans
(c) Decrease in deferred payment liabilities
(d) Payment of tax, dividend
(e) Decrease in unsecured loans and deposits
119. Budget: It is a detailed plan of operations for some specific future period. It is an
estimate prepared in advance of the period to which it applies.
120. Budgetary control: It is the system of management control and accounting in which all
operations are forecasted and so for as possible planned ahead, and the actual results compared with
the forecasted and planned ones.
121. Cash budget: It is a summary statement of firm’s expected cash inflow and outflow
over a specified time period.
122. Master budget: A summary of budget schedules in capsule form made for the purpose
of presenting in one report the highlights of the budget forecast.
123. Fixed budget: It is a budget, which is designed to remain unchanged irrespective of the
level of activity actually attained.
124. Zero- base- budgeting: It is a management tool which provides a systematic method
for evaluating all operations and programmes, current of new allows for budget reductions and
expansions in a rational inner and allows reallocation of source from low to high priority programs.
125. Goodwill: The present value of firm’s anticipated excess earnings.
126. BRS: It is a statement reconciling the balance as shown by the bank pass book and
balance shown by the cash book.
127. Objective of BRS: The objective of preparing such a statement is to know the causes of
difference between the two balances and pass necessary correcting or adjusting entries in the books
of the firm.
128. Responsibilities of accounting: It is a system of control by delegating and locating the
Responsibilities for costs.
129. Profit centre: A centre whose performance is measured in terms of both the expense
incurs and revenue it earns.

130. Cost centre: A location, person or item of equipment for which cost may be ascertained
and used for the purpose of cost control.
131. Cost: The amount of expenditure incurred on to a given thing.
132. Cost accounting: It is thus concerned with recording, classifying, and summarizing
costs for determination of costs of products or services planning, controlling and reducing such costs
and furnishing of information management for decision making.
133. Elements of cost:
(A) Material
(B) Labour
(C) Expenses
(D) Overheads
134. Components of total costs: (A) Prime cost (B) Factory cost
(C)Total cost of production (D) Total c0st
135. Prime cost: It consists of direct material direct labour and direct expenses. It is also
known as basic or first or flat cost.
136. Factory cost: It comprises prime cost, in addition factory overheads which include cost
of indirect material indirect labour and indirect expenses incurred in factory. This cost is also known
as works cost or production cost or manufacturing cost.
137. Cost of production: In office and administration overheads are added to factory cost,
office cost is arrived at.
138. Total cost: Selling and distribution overheads are added to total cost of production to
get the total cost or cost of sales.
139. Cost unit: A unit of quantity of a product, service or time in relation to which costs may
be ascertained or expressed.
140.Methods of costing: (A)Job costing (B)Contract costing (C)Process costing
(D)Operation costing (E)Operating costing (F)Unit costing (G)Batch costing.
141. Techniques of costing: (a) marginal costing (b) direct costing (c) absorption costing (d)
uniform costing.
142. Standard costing: standard costing is a system under which the cost of the product is
determined in advance on certain predetermined standards.
143. Marginal costing: it is a technique of costing in which allocation of expenditure to
production is restricted to those expenses which arise as a result of production, i.e., materials, labour,
direct expenses and variable overheads.
144. Derivative: derivative is product whose value is derived from the value of one or more
basic variables of underlying asset.
145. Forwards: a forward contract is customized contracts between two entities were
settlement takes place on a specific date in the future at today’s pre agreed price.
146. Futures: A future contract is an agreement between two parties to buy or sell an asset at
a certain time in the future at a certain price. Future contracts are standardized exchange traded
contracts.
147. Options: An option gives the holder of the option the right to do something. The option
holder option may exercise or not.
148. Call option: A call option gives the holder the right but not the obligation to buy an
asset by a certain date for a certain price.
149. Put option: A put option gives the holder the right but not obligation to sell an asset by
a certain date for a certain price.

150. Option price: Option price is the price which the option buyer pays to the option seller.
It is also referred to as the option premium.
151. Expiration date: The date which is specified in the option contract is called expiration
date.
152. European option: It is the option at exercised only on expiration date itself.
153. Basis: Basis means future price minus spot price.
154. Cost of carry: The relation between future prices and spot prices can be summarized in
terms of what is known as cost of carry.
155. Initial margin: The amount that must be deposited in the margin a/c at the time of first
entered into future contract is known as initial margin.
156 Maintenance margin: This is somewhat lower than initial margin.
157. Mark to market: In future market, at the end of the each trading day, the margin a/c is
adjusted to reflect the investors’ gains or loss depending upon the futures selling price. This is called
mark to market.
158. Baskets: basket options are options on portfolio of underlying asset.
159. Swaps: swaps are private agreements between two parties to exchange cash flows in the
future according to a pre agreed formula.
160. Impact cost: Impact cost is cost it is measure of liquidity of the market. It reflects the
costs faced when actually trading in index.
161. Hedging: Hedging means minimize the risk.
162. Capital market: Capital market is the market it deals with the long term investment
funds. It consists of two markets 1.primary market 2.secondary market.
163. Primary market: Those companies which are issuing new shares in this market. It is
also called new issue market.
164. Secondary market: Secondary market is the market where shares buying and selling. In
India secondary market is called stock exchange.
165. Arbitrage: It means purchase and sale of securities in different markets in order to
profit from price discrepancies. In other words arbitrage is a way of reducing risk of loss caused by
price fluctuations of securities held in a portfolio.
166. Meaning of ratio: Ratios are relationships expressed in mathematical terms between
figures which are connected with each other in same manner.
167. Activity ratio: It is a measure of the level of activity attained over a period.
168. Mutual fund: A mutual fund is a pool of money, collected from investors, and is
invested according to certain investment objectives.
169. Characteristics of mutual fund: Ownership of the MF is in the hands of the of the
investors MF managed by investment professionals The value of portfolio is updated every day
170. Advantage of MF to investors: Portfolio diversification Professional management
Reduction in risk Reduction of transaction casts Liquidity Convenience and flexibility
171. Net asset value: the value of one unit of investment is called as the Net Asset Value
172. Open-ended fund: open ended funds means investors can buy and sell units of fund, at
NAV related prices at any time, directly from the fund this is called open ended fund.
173. Close ended funds: close ended funds means it is open for sale to investors for a
specific period, after which further sales are closed. Any further transaction for buying the units or
repurchasing them, happen, in the secondary markets.
174. Dividend option: investors who choose a dividend on their investments, will receive
dividends from the MF, as when such dividends are declared.

175. Growth option: investors who do not require periodic income distributions can be
choose the growth option.
176. Equity funds: equity funds are those that invest pre-dominantly in equity shares of
company.
177. Types of equity funds: Simple equity funds Primary market funds Sectoral funds Index
funds
178. Sectoral funds: Sectoral funds choose to invest in one or more chosen sectors of the
equity markets.
179. Index funds: The fund manager takes a view on companies that are expected to perform
well, and invests in these companies
180. Debt funds: the debt funds are those that are pre-dominantly invest in debt securities.
181. Liquid funds: the debt funds invest only in instruments with maturities less than one
year.
182. Gilt funds: gilt funds invests only in securities that are issued by the GOVT. and
therefore does not carry any credit risk.
183. Balanced funds: Funds that invest both in debt and equity markets are called balanced
funds.
184. Sponsor: sponsor is the promoter of the MF and appoints trustees, custodians and the
AMC with prior approval of SEBI.
185. Trustee: Trustee is responsible to the investors in the MF and appoint the AMC for
managing the investment portfolio.
186. AMC: the AMC describes Asset Management Company; it is the business face of the
MF, as it manages all the affairs of the MF.
187. R & T Agents: the R&T agents are responsible for the investor servicing functions, as
they maintain the records of investors in MF.
188. Custodians: Custodians are responsible for the securities held in the mutual fund’s
portfolio.
189. Scheme takes over: if an existing MF scheme is taken over by another AMC, it is
called as scheme take over.
190. Meaning of load: Load is the factor that is applied to the NAV of a scheme to arrive at
the price.
192. Market capitalization: market capitalization means number of shares issued multiplied
with market price per share.
193. Price earnings ratio: The ratio between the share price and the post tax earnings of
company is called as price earnings ratio.
194. Dividend yield: The dividend paid out by the company, is usually a percentage of the
face value of a share.
195. Market risk: It refers to the risk which the investor is exposed to as a result of adverse
movements in the interest rates. It also referred to as the interest rate risk.
196. Re-investment risk: It the risk which an investor has to face as a result of a fall in the
interest rates at the time of reinvesting the interest income flows from the fixed income security.
197. Call risk: Call risk is associated with bonds have an embedded call option in them. This
option hives the issuer the right to call back the bonds prior to maturity.
198. Credit risk: Credit risk refers to the probability that a borrower could default on a
commitment to repay debt or band loans
199. Inflation risk: Inflation risk reflects the changes in the purchasing power of the cash
flows resulting from the fixed income security.

200. Liquid risk: It is also called market risk, it refers to the ease with which bonds could be
traded in the market.
201. Drawings: Drawings denotes the money withdrawn by the proprietor from the business
for his personal use.
202. Outstanding Income: Outstanding Income means income which has become due
during the accounting year but which has not so far been received by the firm.
203. Outstanding Expenses: Outstanding Expenses refer to those expenses which have
become due during the accounting period for which the Final Accounts have been prepared but have
not yet been paid.
204. Closing stock: The term closing stock means goods lying unsold with the businessman
at the end of the accounting year.
205. Methods of depreciation:
1. Unirorm charge methods:
a. Fixed installment method
b .Depletion method
c. Machine hour rate method.
2. Declining charge methods:
a. Diminishing balance method
b. Sum of years digits method
c. Double declining method
3. Other methods:
a. Group depreciation method
b. Inventory system of depreciation
c. Annuity method
d. Depreciation fund method
e. Insurance policy method.
206. Accrued Income: Accrued Income means income which has been earned by the
business during the accounting year but which has not yet become due and, therefore, has not been
received.
207. Gross profit ratio: it indicates the efficiency of the production/trading operations.
Formula : Gross profit
-------------------X100
Net sales
208. Net profit ratio: it indicates net margin on sales
Formula: Net profit
--------------- X 100
Net sales
209. Return on share holders’ funds: it indicates measures earning power of equity capital.
Formula:
Profits available for Equity shareholders
-----------------------------------------------X 100
Average Equity Shareholders Funds
210. Earning per Equity share (EPS): it shows the amount of earnings attributable to each
equity share.

Formula:
Profits available for Equity shareholders
----------------------------------------------
Number of Equity shares
211. Dividend yield ratio: it shows the rate of return to shareholders in the form of
dividends based in the market price of the share
Formula:
Dividend per share
---------------------------- X100
Market price per share
212. Price earnings ratio: it a measure for determining the value of a share. May also be
used to measure the rate of return expected by investors.
Formula: Market price of share (MPS)
------------------------------------X 100
Earnings per share (EPS)
213. Current ratio: it measures short-term debt paying ability.
Formula:
Current Assets
------------------------
Current Liabilities
214. Debt-Equity Ratio: it indicates the percentage of funds being financed through
borrowings; a measure of the extent of trading on equity.
Formula: Total Long-term Debt
---------------------------
Shareholders’ funds
215. Fixed Assets ratio: This ratio explains whether the firm has raised adequate long-term
funds to meet its fixed assets requirements.
Formula: Fixed Assets
-------------------
Long-term Funds
216. Quick Ratio: The ratio termed as ‘liquidity ratio’. The ratio is ascertained y comparing
the liquid assets to current liabilities.
Formula:
Liquid Assets
------------------------
Current Liabilities
217. Stock turnover Ratio: The ratio indicates whether investment in inventory in
efficiently used or not. It, therefore explains whether investment in inventory within proper limits or
not.
Formula: cost of goods sold
------------------------------

Average stock
218. Debtors Turnover Ratio: The ratio the better it is, since it would indicate that debts are
being collected more promptly. The ration helps in cash budgeting since the flow of cash from
customers can be worked out on the basis of sales.
Formula: Credit sales
----------------------------
Average Accounts Receivable
219. Creditors Turnover Ratio: It indicates the speed with which the payments for credit
purchases are made to the creditors.
Formula: Credit Purchases
-----------------------
Average Accounts Payable
220. Working capital turnover ratio: It is also known as Working Capital Leverage Ratio.
This ratio indicates whether or not working capital has been effectively utilized in making sales.
Formula: Net Sales
----------------------------
Working Capital
221. Fixed Assets Turnover ratio: This ratio indicates the extent to which the investments
in fixed assets contribute towards sales.
Formula: Net Sales
--------------------------
Fixed Assets
222 .Pay-outs Ratio: This ratio indicates what proportion of earning per share has been used
for paying dividend.
Formula: Dividend per Equity Share
--------------------------------------------X100
Earning per Equity share
223. Overall Profitability Ratio: It is also called as “Return on Investment” (ROI) or Return
on Capital Employed (ROCE). It indicates the percentage of return on the total capital employed in
the business.
Formula: Operating profit
------------------------X 100
Capital employed
The term capital employed has been given different meanings a.sum total of all assets
Whether fixed or current b.sum total of fixed assets, c.sum total of long-term funds employed In the
business, i.e., share capital +reserves &surplus +long term loans – (non business assets + fictitious
assets). Operating profit means ‘profit before interest and tax’
224. Fixed Interest Cover ratio: The ratio is very important from the lender’s point of view.
It indicates whether the business would earn sufficient profits to pay periodically the interest charges.
Formula: Income before interest and Tax
---------------------------------------

Interest Charges
225. Fixed Dividend Cover ratio: This ratio is important for preference shareholders
entitled to get dividend at a fixed rate in priority to other shareholders.
Formula: Net Profit after Interest and Tax
------------------------------------------
Preference Dividend
226. Debt Service Coverage ratio: This ratio is explained ability of a company to make
payment of principal amounts also on time.
Formula: Net profit before interest and tax
----------------------------------------------- 1-Tax rate
Interest + Principal payment installment
227. Proprietary ratio: It is a variant of debt-equity ratio . It establishes relationship
between the proprietor’s funds and the total tangible assets.
Formula: Shareholders funds
------------------------------
Total tangible assets
228. Difference between joint venture and partnership: In joint venture the business is
carried on without using a firm name, In the partnership, the business is carried on under a firm
name. In the joint venture, the business transactions are recorded under cash system In the
partnership, the business transactions are recorded under mercantile system. In the joint venture,
profit and loss is ascertained on completion of the venture In the partnership, profit and loss is
ascertained at the end of each year. In the joint venture, it is confined to a particular operation and it
is temporary. In the partnership, it is confined to a particular operation and it is permanent.
229. Meaning of Working capital: The funds available for conducting day to day operations
of an enterprise. Also represented by the excess of current assets over current liabilities.
230. Concepts of accounting:
1. Business entity concepts: - According to this concept, the business is treated as a separate
entity distinct from its owners and others.
2. Going concern concept :- According to this concept, it is assumed that a business has a
reasonable expectation of continuing business at a profit for an indefinite period of time.
3. Money measurement concept :- This concept says that the accounting records only those
transactions which can be expressed in terms of money only.
4. Cost concept: - According to this concept, an asset is recorded in the books at the price
paid to acquire it and that this cost is the basis for all subsequent accounting for the asset.
5. Dual aspect concept: - In every transaction, there will be two aspects – the receiving aspect
and the giving aspect; both are recorded by debiting one accounts and crediting another account. This
is called double entry.
6. Accounting period concept: - It means the final accounts must be prepared on a periodic
basis. Normally accounting period adopted is one year, more than this period reduces the utility of
accounting data.
7. Realization concept: - According to this concepts, revenue is considered as being earned
on the data which it is realized, i.e., the date when the property in goods passes the buyer and he
become legally liable to pay.
8. Materiality concepts: - It is a one of the accounting principle, as per only important
information will be taken, and UN important information will be ignored in the preparation of the
financial statement.

9. Matching concepts: - The cost or expenses of a business of a particular period are
compared with the revenue of the period in order to ascertain the net profit and loss.
10. Accrual concept: - The profit arises only when there is an increase in owners capital,
which is a result of excess of revenue over expenses and loss.
231. Financial analysis: The process of interpreting the past, present, and future financial
condition of a company.
232. Income statement: An accounting statement which shows the level of revenues,
expenses and profit occurring for a given accounting period.
233. Annual report: The report issued annually by a company, to its share holders. it
containing financial statement like, trading and profit & lose account and balance sheet.
234. Bankrupt: A statement in which a firm is unable to meets its obligations and hence, it is
assets are surrendered to court for administration
235. Lease: Lease is a contract between to parties under the contract, the owner of the asset
gives the right to use the asset to the user over an agreed period of the time for a consideration.
236. Opportunity cost: The cost associated with not doing something.
237. Budgeting: The term budgeting is used for preparing budgets and other producer for
planning,co-ordination,and control of business enterprise.
238. Capital: The term capital refers to the total investment of company in money, tangible
and intangible assets. It is the total wealth of a company.
239. Capitalization: It is the sum of the par value of stocks and bonds out standings.
240. Over capitalization: When a business is unable to earn fair rate on its outstanding
securities.
241. Under capitalization: When a business is able to earn fair rate or over rate on it is
outstanding securities.
242. Capital gearing: The term capital gearing refers to the relationship between equity and
long term debt.
243. Cost of capital: It means the minimum rate of return expected by its investment.
244. Cash dividend: The payment of dividend in cash
245. Define the term accrual: Recognition of revenues and costs as they are earned or
incurred. it includes recognition of transaction relating to assets and liabilities as they occur
irrespective of the actual receipts or payments.
245. Accrued expenses: An expense which has been incurred in an accounting period but for
which no enforceable claim has become due in what period against the enterprises.
246. Accrued revenue: Revenue which has been earned is an earned is an accounting period
but in respect of which no enforceable claim has become due to in that period by the enterprise.
247. Accrued liability: A developing but not yet enforceable claim by another person which
accumulates with the passage of time or the receipt of service or otherwise. It may rise from the
purchase of services which at the date of accounting have been only partly performed and are not yet
billable.
248. Convention of Full disclosure: According to this convention, all accounting statements
should be honestly prepared and to that end full disclosure of all significant information will be
made.
249. Convention of consistency: According to this convention it is essential that accounting
practices and methods remain unchanged from one year to another.
250. Define the term preliminary expenses: Expenditure relating to the formation of an
enterprise. There include legal accounting and share issue expenses incurred for formation of the
enterprise.
251. Meaning of Charge: charge means it is a obligation to secure an indebt ness. It may be
fixed charge and floating charge.

252. Appropriation: It is application of profit towards Reserves and Dividends.
253. Absorption costing: A method where by the cost is determine so as to include the
appropriate share of both variable and fixed costs.
254. Marginal Cost: Marginal cost is the additional cost to produce an additional unit of a
product. It is also called variable cost.
255. What are the ex-ordinary items in the P&L a/c: The transaction which is not related
to the business is termed as ex-ordinary transactions or ex-ordinary items. Egg:- profit or losses on
the sale of fixed assets, interest received from other company investments, profit or loss on foreign
exchange, unexpected dividend received.
256. Share premium: The excess of issue of price of shares over their face value. It will be
showed with the allotment entry in the journal; it will be adjusted in the balance sheet on the
liabilities side under the head of “reserves & surplus”.
257. Accumulated Depreciation: The total to date of the periodic depreciation charges on
depreciable assets.
258. Investment: Expenditure on assets held to earn interest, income, profit or other benefits.
259. Capital: Generally refers to the amount invested in an enterprise by its owner. Ex; paid
up share capital in corporate enterprise.
260. Capital Work In Progress: Expenditure on capital assets which are in the process of
construction as completion.
261. Convertible Debenture: A debenture which gives the holder a right to conversion
wholly or partly in shares in accordance with term of issues.
262. Redeemable Preference Share: The preference share that is repayable either after a
fixed (or) determinable period (or) at any time dividend by the management.
263. Cumulative preference shares: A class of preference shares entitled to payment of
emulates dividends. Preference shares are always deemed to be cumulative unless they are expressly
made non-cumulative preference shares.
264. Debenture redemption reserve: A reserve created for the redemption of debentures at
a future date.
265. Cumulative dividend: A dividend payable as cumulative preference shares which it
unpaid Emulates as a claim against the earnings of a corporate before any distribution is made to the
other shareholders.
266. Dividend Equalization reserve: A reserve created to maintain the rate of dividend in
future years.
267. Opening Stock: The term ‘opening stock’ means goods lying unsold with the
businessman in the beginning of the accounting year. This is shown on the debit side of the trading
account.
268. Closing Stock: The term ‘Closing Stock’ includes goods lying unsold with the
businessman at the end of the accounting year. The amount of closing stock is shown on the credit
side of the trading account and as an asset in the balance sheet.
269. Valuation of closing stock: The closing stock is valued on the basis of “Cost or Market
prices whichever is less” principle.
272. Contingency: A condition (or) situation the ultimate out comes of which gain or loss
will be known as determined only as the occurrence or non occurrence of one or more uncertain
future events.
273. Contingent Asset: An asset the existence ownership or value of which may be known
or determined only on the occurrence or non occurrence of one more uncertain future event.
274. Contingent liability: An obligation to an existing condition or situation which may
arise in future depending on the occurrence of one or more uncertain future events.

275. Deficiency: the excess of liabilities over assets of an enterprise at a given date is called
deficiency.
276. Deficit: The debit balance in the profit and loss a/c is called deficit.
277. Surplus: Credit balance in the profit & loss statement after providing for proposed
appropriation & dividend, reserves.
278. Appropriation Assets: An account sometimes included as a separate section of the
profit and loss statement showing application of profits towards dividends, reserves.
279. Capital redemption reserve: A reserve created on redemption of the average cost: - the
cost of an item at a point of time as determined by applying an average of the cost of all items of the
same nature over a period. When weights are also applied in the computation it is termed as weight
average cost.
280. Floating Change: Assume change on some or all assets of an enterprise which are not
attached to specific assets and are given as security against debt.
281. Difference between Funds flow and Cash flow statement: A Cash flow statement is
concerned only with the change in cash position while a funds flow analysis is concerned with
change in working capital position between two balance sheet dates. A cash flow statement is merely
a record of cash receipts and disbursements. While studying the short-term solvency of a business
one is interested not only in cash balance but also in the assets which are easily convertible into cash.
282. Difference between the Funds flow and Income statement:
A funds flow statement deals with the financial resource required for running the business
activities. It explains how were the funds obtained and how were they used, whereas an income
statement discloses the results of the business activities, i.e., how much has been earned and how it
has been spent. A funds flow statement matches the “funds raised” and “funds applied” during a
particular period. The source and application of funds may be of capital as well as of revenue nature.
An income statement matches the incomes of a period with the expenditure of that period, which are
both of a revenue nature.

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