conservation

 Prudence concept: revenue and profits are included in the balance sheet only when they are realized(or
there is reasonable 'certainty' of realizing them) butliabilities are included when there is a reasonable
'possibility' of incurring them. Also called conservation concept.

Du Pont analysis
A type of analysis that examines a company's Return on Equity (ROE) by breaking it into three
main components:profit margin, asset turnover and leverage factor. By breaking the ROE into
distinct parts, investors can examine how effectively a company is using equity, since poorly performing
components will drag down the overall figure. To calculate a firm's ROE through Du Pont analysis, multiply
theprofit margin (net income divided by sales), asset turnover(sales divided by assets) and leverage factor
(total assetsdivided by shareholders' equity) together. The higher theresult, the higher the return on equity.

Return on Equity
ROE. A measure of how well a company used reinvestedearnings to generate additional earnings, equal to
a fiscal year's after-tax income (after preferred stock dividends but before common stock dividends) divided
by book value, expressed as a percentage. It is used as a general indication of the company's efficiency; in
other words, how much profitit is able to generate given the resources provided by
itsstockholders. investors usually look for companies withreturns on equity that are high and growing.

Net Working Capital

Net Working Capital, is defined as Current Assets minus Current Liabilities. Current assets include stocks,
debtors, cash & equivalents and other current assets. Current liabilities include all the short-term
borrowings. The formula is the following and the figures are expressed in millions:

operation costing
hybrid of job-order and process cost systems. Companies that manufacture goods that undergo some similar
and some dissimilar processes use this system. Operation costing accumulates total conversion costs and
determines a unit conversion cost for each operation. However, direct material costs are charged specifically
to products as in job-order systems.

Amortization

1. The paying off of debt in regular installments over a period of time. 

2. The deduction of capital expenses over a specific period of time (usually over the asset's life). More
specifically, this method measures the consumption of the value of intangible assets, such as a patent
or a copyright.

Preliminary expenses

These are incurred for the incorporation of a company. They may be paid by the promoters before the
company is incorporated or by the company after it is incorporated. And they include the following: a)
professional charges paid for drafting of memorandum of association and articles of association; b)
professional charges for consultation in incorporating the company; c) cost of printing of the initial copies of
MoA and AoA; d) stamp duty for the documents; e) registration fee paid to the Registrar of Companies (RoC)
for incorporation; f) bank charges incurred on the above; and g) incidental expenses such as stationary,
conveyance, and so on.

capital gain
The amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain is
an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn't been
sold yet but would result in a profit if sold. Capital gain is often used to mean realized capital gain. For most
investments sold at a profit, including mutual funds, bonds, options, collectibles, homes, and businesses,
the IRS is owed money called capital gains tax. opposite of capital loss.

Leverage
1. The use of various financial instruments or borrowed capital, such as margin, to increase the
potential return of an investment. 

2. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity
is considered to be highly leveraged. 

Leverage is most commonly used in real estate transactions through the use of mortgages to
purchase a home.

Job Costing

Job Costing involves preparation to calculate the costs involved of a business manufacturing goods. These
costs are recorded in ledger accounts throughout the year and are then shown in the final trial balance
before the preparing of the manufacturing statement

a c c o u n ti n g c o n c e p t a n d c o n v e n ti o n s

In drawing up accounting statements, whether they are external "financial accounts" or internally-focused
"management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of
the business and the results of its operation.

The theory of accounting has, therefore, developed the concept of a "true and fair view". The true and fair
view is applied in ensuring and assessing whether accounts do indeed portray accurately the business'
activities.

To support the application of the "true and fair view", accounting has adopted certain concepts and
conventions which help to ensure that accounting information is presented accurately and consistently.

Accounting Conventions

The most commonly encountered convention is the "historical cost convention". This requires transactions
to be recorded at the price ruling at the time, and for assets to be valued at their original cost.
Under the "historical cost convention", therefore, no account is taken of changing prices in the economy.

The other conventions you will encounter in a set of accounts can be summarized as follows:

Monetary Accountants do not account for items unless they can be quantified in monetary terms.
measurement Items that are not accounted for (unless someone is prepared to pay something for
them) include things like workforce skill, morale, market leadership, brand recognition,
quality of management etc.
Separate Entity This convention seeks to ensure that private transactions and matters relating to the
owners of a business are segregated from transactions that relate to the business.
Realization With this convention, accounts recognize transactions (and any profits arising from
them) at the point of sale or transfer of legal ownership - rather than just when cash
actually changes hands. For example, a company that makes a sale to a customer can
recognize that sale when the transaction is legal - at the point of contract. The actual
payment due from the customer may not arise until several weeks (or months) later - if
the customer has been granted some credit terms.
Materiality An important convention. As we can see from the application of accounting standards
and accounting policies, the preparation of accounts involves a high degree of
judgment. Where decisions are required about the appropriateness of a particular
accounting judgment, the "materiality" convention suggests that this should only be an
issue if the judgment is "significant" or "material" to a user of the accounts. The
concept of "materiality" is an important issue for auditors of financial accounts.
Accounting Concepts

Four important accounting concepts underpin the preparation of any set of accounts:

Going Concern Accountants assume, unless there is evidence to the contrary, that a company is not
going broke. This has important implications for the valuation of assets and liabilities.
Consistency Transactions and valuation methods are treated the same way from year to year, or
period to period. Users of accounts can, therefore, make more meaningful comparisons
of financial performance from year to year. Where accounting policies are changed,
companies are required to disclose this fact and explain the impact of any change.
Prudence Profits are not recognised until a sale has been completed. In addition, a cautious view is
taken for future problems and costs of the business (the are "provided for" in the
accounts" as soon as their is a reasonable chance that such costs will be incurred in the
future.
Matching (orIncome should be properly "matched" with the expenses of a given accounting period.
"Accruals")

What is absorption?

The direct material, direct labour/labor and direct expenses which form part of the prime-cost are all direct
costs. They are capable of being allocated(attributed) to the manufacture of a product directly.
Costs apart from the prime cost are collectively called overheads. These costs are not attributed directly to
products or services or cost centers. They are attributed by the process of allocation and apportionment of
overheads, apportionment being done depending on some rational basis.

We can understand what absorption means, if we go through the process of preparation of a cost sheet.

Absorption of
Direct costs

We first consider the prime cost which is made up of Direct Material, Direct Labor and Direct Expenses. We
can say that the direct material, direct/labor and direct expenses are absorbed into costs.

However, we do not find the term “absorption” being used with regard to direct costs in arriving at prime
cost.

Factor Overheads

We add up factory overheads to prime cost to arrive at factory/ works cost.

We can say that factory Overheads are absorbed into cost to arrive at the factory cost.

Office/Administrative Overheads

We add up administrative overheads to cost of production to arrive at cost of sales.

We can say that selling and distribution overheads are absorbed into cost to arrive at the cost of sales.
 SECTION 35D
PRELIMINARY EXPENSES
Conditions precedent - Where assessee had not satisfied conditions prescribed under section 35D(2),
assessee would not be entitled to amortisation under section 35D even if assessee proved that it was an
industrial undertaking as contemplated under section 35D(1) - Agrocargo Transport Ltd. v. CIT [1997] 91
Taxman 44/224 ITR 90 (Mad.).
Expenditure on public issue of shares can be amortised - Where business of assessee-company had not yet
commenced, expenditure on public issue of shares could be amortised under section 35D - Goa Carbon
Ltd. v. CIT [1994] 73 Taxman 68 (Bom.).
Stamp duty will also qualify for deduction - The expression ‘in connection with the issue of public
subscription of the debentures of the company essentially for the expansion of business’ is a very wide
expression and would certainly include the stamp duty payable by the assessee on the debenture issue.
Hence stamp duty paid will also qualify for deduction under section 35D(2)(c) of the Act - CIT v.Mahindra
Ugine & Steel Co. Ltd. [2001] 250 ITR 84 (Bom.).
Fees paid for increase in share capital is not deductible - Under section 35D(2)(c)(iii) of the Act, only fees
paid for registration of a company is deductible. Fees paid for increase in share capital is not fees for
registration of the company, and hence is not amortisable under this provision - CIT v. Hindustan Insecticides
Ltd. [2001] 250 ITR 338 (Delhi).
Management fees and lease rent cannot be spread over - Expenses on management fees and lease rent
incurred before commencement of production cannot be allowed on a spread over basis under section 35D
- 
Debenture issue expenses - Where in order to accomplish expansion activity in their unit, board of directors
of appellant-company resolved to raise money by way of issuance of partly convertible and partly non-
convertible debentures, expenditure incurred towards debenture issue was covered by section 35D(1)(ii)
and 35D(2)(c)(iv) - Shree Synthetics Ltd. v. CIT [2006] 205 CTR (MP) 386.
Share premium, whether ‘Capital employed’ - Premium collected by assessee-company on its subscribed
share capital is not ‘capital employed in business of company’ within meaning of section 35D -Berger Paints
India Ltd. v. CIT [2006] 154 Taxman 293 (Delhi).

 Extending the provision of section 35D relating to amortization of preliminary expenses to all undertakings

11.1 Section 35D provides for deduction of certain specified preliminary expenses. After the commencement of business, the deduction was
being allowed to only an industrial undertaking or unit. In order to provide a level playing field to the services sector, the section has been
amended to provide the benefit of amortization to all assessees after commencement of his business, in connection with the extension of his
undertaking or in connection with his setting up a new unit.

11.2 Applicability: This amendment has been made applicable with effect from 1st April, 2009 and shall accordingly apply for assessment year
2009-10 and subsequent assessment years.