Abcds

EVERSTUDY CLASSES
❖
Glossary of
www.everstudy.co.in Important Terms
Unit II Part 1 (Financial Accounting)
Objectives of this Document

• To provide a bird’s eye view of important terms Relevant for UGC Net
relating to Unit I i.e. Financial Accounting.
• Simple and Brief Explanation of Important Terms
Paper II
alongwith examples wherever required.
(Commerce)
• Use of Pictures, Diagrams and Flowcharts wherever
possible to reinforce the concepts in minds of
learners.
❖ Accounting - Accounting has rightly been termed as the language of the
business. The American Institute of Certified Public Accountants has defined the
Financial Accounting as "the art of recording, classifying and summarizing in as
significant manner and in terms of money transactions and events which in part,
at least of a financial character, and interpreting the results thereof".
❖ Book-Keeping - Book-keeping is a part of accounting and is concerned with the

recording of transactions which is often routine and clerical in nature, whereas
accounting performs other functions as well, viz., measurement and
communication, besides recording.
❖ Accountancy - Although in practice Accountancy and Accounting are used

interchangeably yet there is a thin line of demarcation between them. The word
accounting tries to explain the nature of the work of the accountants (professionals)
and the word Accountancy refers to the profession these people adopt.
❖ Accounting as Science - Science is a systematised body of knowledge. It

establishes a relationship of cause and effect in the various related phenomenon.
It is also based on some fundamental principles. Accounting also has its own
principles e.g. the double entry system, which explains that every transaction has
two fold aspect i.e. debit and credit. So we can say that accounting is a science.
❖ Accounting as Art - Art requires a perfect knowledge, interest and experience to

do a work efficiently. Accounting is an art as it also requires knowledge, interest
and experience to maintain the books of accounts in a systematic manner.
Everybody cannot become a good accountant.
www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Accounting as Information System - As an information system, accounting links
an information source or transmitter (generally the accountant), a channel of
communication (generally the financial statements) and a set of receivers (external
users).
❖ Cash System of Accounting - Under this system, actual cash receipts and actual
cash payments are recorded. Credit transactions are not recorded at all until the
cash in actually received or paid. The Receipts and Payments Account prepared
in case of non-trading concerns such as a charitable institution, a club, a school, a
college, etc. and professional men like a lawyer, a doctor, a chartered accountant
etc. can be cited as the best example of cash system. This system does not make
a complete record of financial transactions of a trading period as it does not record
outstanding transactions like outstanding expenses and outstanding incomes.
❖ Mercantile system of Accounting - Under this system all transactions relating to

a period are recorded in the books of account i.e., in addition to actual receipts and
payments of cash income receivable and expenses payable are also recorded.
The system being based on a complete record of the financial transactions
discloses correct profit or loss for a particular period and also exhibits true financial
position of the business on a particular day.
❖ Double Entry System of Accounting - According to this system the total amount
debited always equals the total amount credited. It follows from ‘dual aspect
concept’ that at any point in time owners’ equity and liabilities for any accounting
entity will be equal to assets owned by that entity.
❖ Accounting Equation – It describes the relationship between assets, liabilities

and owner’s equity (capital). It is described as follows:
Assets = Liabilities + Owners Equity ...............(1)
Owners Equity = Assets - Liabilities ...............(2)
The total of assets will be equal to total of liabilities plus owners capital because all assets
of the business are claimed by either owners or outsiders.
❖ Accounting Principles - Financial statements are the product of a process in

which a large volume of data about aspects of the economic activities of an
enterprise are accumulated, analysed and reported. This process should be
carried out in conformity with generally accepted accounting principles. These
principles represent the most current consensus about how accounting information
should be recorded, what information should be disclosed, how it should be
disclosed, and which financial statement should be prepared. The general
acceptance of an accounting principle usually depends on its usefulness,
objectiveness and feasibility.
❖ Generally Accepted Accounting Principles (GAAP) - GAAP is a cluster of

accounting standards and common industry usage that have been developed over
many years. It is used by organizations to:
(a) Properly organize their financial information into accounting records;

(b) Summarize the accounting records into financial statements; and
(c) Disclose certain supporting information.
One of the reasons for using GAAP is so that anyone reading the financial statements
of multiple companies has a reasonable basis for comparison, since all companies
using GAAP have created their financial statements using the same set of rules.
❖ Accounting Concepts - The term ‘Concept’ is used to connote the accounting

postulates, i.e., necessary assumptions and ideas which are fundamental to
accounting practice. In other words, fundamental accounting concepts are broad
general assumptions which underline the periodic financial statements of business
enterprises. Examples include business entity, money measurement, going
concern, matching concept.
❖ Accounting Conventions - The term ‘convention’ is used to signify customs or

tradition as a guide to the preparation of accounting statements. Accounting
Conventions include convention of materiality, conservatism and consistency.
❖ Separate Business Entity Concept - In accounting we make a distinction

between business and the owner. All the books of accounts records day to day
financial transactions from the view point of the business rather than from that of
the owner. For instance, when a person invests Rs. 1 lakh into a business, it will
be treated that the business has borrowed that much money from the owner and
it will be shown as a ‘capital’ in the books of accounts of business.
❖ Money Measurement Concept - In accounting, only those business transactions

are recorded which can be expressed in terms of money. In other words, a fact or

transaction or happening which cannot be expressed in terms of money is not
recorded in the accounting books. This concept imposes two limitations. You
cannot record those important things which cannot be expressed in monetary
terms like general health condition of the Managing Director of the company.
Secondly, use of money implies that we assume stable or constant value of rupee.
❖ Dual Aspect Concept - Financial accounting records all the transactions and
events involving financial element. Each of such transactions requires two aspects
to be recorded. The recognition of these two aspects of every transaction is known
as a dual aspect analysis. According to this concept every business transactions
has dual effect. For example, if a firm sells goods of Rs. 10,000 this transaction
involves two aspects. One aspect is the delivery of goods and the other aspect is
immediate receipt of cash (in the case of cash sales). Infact, the term ‘double entry’
book keeping has come into vogue because for every transaction two entries are
made.
❖ Going Concern Concept - Accounting assumes that the business entity will
continue to operate for a long time in the future unless there is good evidence to
the contrary. The enterprise is viewed as a going concern, that is, as continuing in
operations, at least in the foreseeable future. In other words, there is neither the
intention nor the necessity to liquidate the particular business venture in the
predictable future. Because of this assumption, the accountant while valuing the
assets do not take into account sale value of them.
❖ Accounting Period Concept - This concept requires that the life of the business
should be divided into appropriate segments for studying the financial results
shown by the enterprise after each segment. A year is the most common interval
on account of prevailing practice, tradition and government requirements. Some
firms adopt financial year of the government, some other calendar year.
❖ Cost Concept - According to this concept an asset is ordinarily entered on the

accounting records at the price paid to acquire it. For example, if a business buys
a plant for Rs. 5 lakh the asset would be recorded in the books at Rs. 5 lakh, even
if its market value at that time happens to be Rs. 6 lakh. The cost concept does
not mean that all assets remain on the accounting records at their original cost for
all times to come. The asset may systematically be reduced in its value by charging
‘depreciation’.

❖ Matching Concept - This concept is based on the accounting period concept. In
reality we match revenues and expenses during the accounting periods. Income
made by the enterprise during a period can be measured only when the revenue
earned during a period is compared (matched) with the expenditure incurred for
earning that revenue. On account of this concept, adjustments are made for all
prepaid expenses, outstanding expenses, accrued income, etc, while preparing
periodic reports.
❖ Accrual Concept – Accrual concept is the most fundamental principle of

accounting which requires recording revenues when they are earned and not when
they are received in cash and recording expenses when they are incurred and not
when they are paid. Example - A business records its utility bills as soon as it
receives them and not when they are paid, because the service has already been
used. The company ignores the date when the payment will be made.
❖ Materiality Convention - Materiality concept states that items of small

significance need not be given strict theoretically correct treatment. For example,
an ordinary calculator costing Rs. 100 may last for ten years. However, the effort
involved in allocating its cost over the ten year period is not worth the benefit that
can be derived from this operation. The cost incurred on calculator may be treated
as the expense of the period in which it is purchased. It should be noted that an
item material for one party may be immaterial for another. It is a matter of
judgement and common sense.
❖ Conservatism Convention - According to this convention, revenues or gains

should be recognised only when they are realised in the form of cash or assets
(i.e. debts) the ultimate cash realisation of which can be assessed with reasonable
certainty. Further, provision must be made for all known liabilities, expenses and
losses. Examples include - ‘Valuing the stock in trade at market price or cost price
which ever is less’ and ‘making the provision for doubtful debts on debtors in
anticipation of actual bad debts’.
❖ Consistency Convention - The convention of consistency requires that once a

firm decided on certain accounting policies and methods and has used these for
some time, it should continue to follow the same methods or procedures for all
subsequent similar events and transactions unless it has a sound reason to do
otherwise. For example, if depreciation is charged on fixed assets according to
straight line method, this method should be followed year after year.

❖ Accounting Standards - They are those rules of action or conduct which are
adopted by the accountants universally while recording accounting transactions.
❖ Accounting Standards Board - In order to harmonise varying accounting policies

and practices, the Institute of Chartered Accountants of India (ICAI) formed the
Accounting Standards Board (ASB) in April, 1977. ASB includes representatives
from industry and government. The main function of the ASB is to formulate
accounting standards. This Board of the Institute of Chartered Accountants of India
has so far formulated around 27 Accounting Standards.
❖ Ind As - Ministry of Corporate Affairs (MCA), in 2015, had notified the Companies
(Indian Accounting Standards (IND AS)) Rules 2015, which stipulated the adoption
and applicability of IND AS in a phased manner beginning from the Accounting
period 2016-17. IND AS are basically standards that have been harmonised with
the IFRS to make reporting by Indian companies more globally accessible.
❖ Accounting Standards vis-à-vis Ind AS -

❖ Personal Account - Accounts which are related to individuals, firms, companies,
co-operative societies, banks, financial institutions are known as personal
accounts. The personal accounts may further be classified into three categories:
(a) Natural Personal Accounts : Accounts of individuals (natural persons) such

as Akhils' A/c, Rajesh's A/c, Sohan's A/c are natural personal accounts.
(b) Artificial Personal Accounts : Accounts of firms, companies, banks,
financial institutions such as Reliance Industries Ltd., Lions Club, M/s Sham
& Sons, Punjab National Bank, National College are artificial personal
accounts.
(c) Representative Personal Accounts : In certain cases (due to the matching
concept of accounting) the amount on a particular date, is payable to the
individuals or recoverable from individuals. Such accounts are classified as
representative personal account e.g., Wages outstanding account, Pre-paid
insurance account etc.
❖ Real Account - Real accounts are the accounts related to assets/properties.

These may be classified into tangible real account and intangible real account. The
accounts relating to tangible assets (which can be touched, purchased and sold)
such as building, plant, machinery, cash, furniture etc. are classified as tangible
real accounts. Intangible real accounts (which do not have physical shape) are the
accounts related to intangible assets such as goodwill, trademarks, copyrights,
patents etc.
❖ Nominal Account - The accounts relating to income, expenses, losses and gains
are classified as nominal accounts. For example Wages Account, Rent Account,
Interest Account, Salary Account, Bad Debts Accounts, Purchases; Account etc.
fall in the category of nominal accounts.
❖ Rules for Debit and Credit – The rules are different for the different types of
accounts:

❖ Accounting Cycle - Accounting cycle or accounting process includes the
following:
(a) Identifying the transactions from source documents like purchase orders, loan
agreements, invoices, etc.
(b) Recording the transactions in the journal proper and other subsidiary books as
and when they take place.
(c) Classifying all entries posted in the journal or subsidiary books and posting them
to the appropriate ledger accounts.
(d) Summarising all the ledger balances and preparing the trial balance and final
accounts with a view to ascertaining the profit or loss made during a particular
period and ascertaining the financial position of the business on that particular
date.
❖ Journal - Journal is the book of primary entry in which every transaction is

recorded before being posted into the ledger. It is that book of account in which
transactions are recorded in a chronological (day to day) order.

❖ Compound Journal Entry - Transactions which are inter-connected and have
taken place simultaneously are recorded by means of a compound or combined
journal entry. For example receipt of cash from a debtor and allowance of discount
to him are recorded by means of a single journal entry.
❖ Subsidiary Books of Accounts - It is not advisable to record all transactions in

one journal for large business organizations. Therefore, the journal is sub-divided
into many subsidiary books. The sub-division of journal into various subsidiary
journals in which transactions of similar nature are recorded are called subsidiary
books. The following are the subsidiary books:
❖ Double Column Cash Book - It has two amount columns on both sides; one is
for cash and another is for discount. Cash column is meant for recording cash
receipts and payments while discount column is meant for recording discount
received and allowed.

Discount columns are merely memorandum columns. Discount allowed account and
discount received account are opened in the ledger and the totals of discount
columns are posted to these accounts.
❖ Triple Column Cash Book - This type of cash book contains the following three
amount columns on each side:
(a) Discount column for discount received and allowed;
(b) Cash column for cash received and cash paid; and
(c) Bank column for money deposited and money withdrawn from the bank.
When triple column cash book is prepared, there is no need for a separate bank
account in the ledger.
❖ Contra Entry - If a transaction involves both cash and bank accounts, it is entered
on both sides of the cash book, one in the cash column and other in the bank
column, though on opposite sides. e.g. when cash is withdrawn from the bank, it
is recorded on the debit side in cash column and on the credit side in the bank
column.

❖ Petty Cash Book - Payments in cash of small amounts like traveling expenses,
postage, carriage etc. are petty cash expenses. These petty cash expenses are
recorded in the petty cash book.
❖ Imprest System - The firm may adopt Imprest System of maintaining petty cash.
The petty cashier is given a certain sum of money at the beginning of the fixed
period (e.g. a month/fortnight) which is called float. The amount of float is so fixed
that it may be adequate to meet petty expenses of the prescribed period. The
balance in the petty cash book shows cash lying with the petty cashier.
❖ Opening Entries - Opening entries are passed at the beginning of the financial
year to open the accounts by recording the assets, liabilities and capital appearing
in the balance sheet of the previous year.
❖ Closing entries - Closing entries are passed at the end of the accounting year for
closing of accounts relating to expenses and revenues. These accounts are closed
by transferring their balances to the Trading and Profit & Loss Account.
❖ Adjustment Entries - At the end of the accounting year, adjustments entries are
passed foroutstanding/prepaid expenses, accrued income/income received in
advance etc. Entries for all theseadjustments are passed in the journal proper.
❖ Transfer Entries - Transfer entries are passed in the general journal for
transferring an item entered in one account to another account. All expenses and
income accounts are closed by transferring them to the respective revenue
accounts such as trading Accounts and profit and loss accounts for examples
salaries account of the current year does not again up the next year.
❖ Ledger - Ledger is the principal book of accounts where similar transactions

relating to a particular person or property or revenue or expense are recorded. The
main function of a ledger is to classify or sort out all the items appearing in the
journal or other subsidiary books under their appropriate accounts so that at the
end of the accounting period each account will contain the entire information of all
the transactions relating to it in a summarised or condensed form.

❖ Posting - The term ‘Posting’ means transferring the debit and credit items from
the journal to their respective accounts in the ledger.
❖ Balancing of an account – It is the process of equalizing the two sides of an

account by putting the difference on the side where amount is short. Where the
debit side of an account exceeds the credit side, the difference is put on the credit
side, and the account is said to have a debit balance.
❖ Trial Balance - A trial balance is a schedule or list of debit and credit balances
extracted from various accounts in the ledger including cash and bank balances
from cash book. Since every transaction has a dual effect i.e. every debit has a
corresponding credit and vice versa, the total of the debit balances and credit
balances extracted from the ledger must tally.

❖ Accounting Errors - Accounting errors are the errors committed by persons
responsible for recording and maintaining accounts of a business firm in the course
of accounting process. These errors may be in the form of omitting the transactions
to record, recording in wrong books, or wrong account or wrong totalling and so
on. Accounting Errors can be classified as:
❖ Errors of omission - When business transaction is either completely or partly

omitted to be recorded in the books of prime entry it is called an ‘error of omission’.
When a business transaction is omitted completely, it is called a ‘complete error of
omission”, and when a business transaction is partly omitted, it is called a “partial
error of omission”. A complete error of omission does not affect the agreement of
trial balance whereas a partial error of omission may or may not affect the
agreement of trial balance. An example of a complete error of omission is goods
purchased or sold may not be recorded in the purchase book or sales book at all.
An example of a partial error of omission is goods purchased for Rs. 5,500
recorded in Purchase Book for Rs. 550.
❖ Error of commission - Such errors are generally committed by the clerical staff
due to their negligence during the course of recording business transactions in the
books of accounts. Though, the rules of debit and credit are followed properly yet
some mistakes are committed. These mistakes may be due to wrong posting of a
business transaction either to a wrong account or on the wrong side of an account,
or due to wrong casting (addition) i.e. over-casting or under-casting or due to
wrong balancing of the accounts in the ledger.
❖ Compensating errors - compensating errors are those errors, which cancel or

compensate themselves. for example, overposting on one side may be
compensated by under posting of an equal amount on the same side of the same
account or over posting of one side of an account may be compensated by an
equal overprinting on the opposite side of some other account. but these errors do
not affect the trial balance.
❖ Capital Expenditure vs. Revenue Expenditure - Capital expenditure contributes

to the revenue earning capacity of a business over more than one accounting
period (like purchase of new building, plant & machinery etc.) whereas revenue
expense is incurred to generate revenue for a particular accounting period. The
revenue expenses either occur in direct relation with the revenue or in relation with
accounting periods, for example cost of goods sold, salaries, rent, etc. Revenue
expenditures are shown in the profit and loss account while capital expenditures
are placed on the asset side of the balance sheet since they generate benefits for
more than are accounting period.
❖ Deferred Revenue Expenditure - There are certain expenses which may be in

the nature of revenue but their benefit may not be consumedin the year in which
such expenditure has been incurred; rather the benefit may extend over a
numberof years, for example, heavy advertising expenditure incurred in
introducing a new line or developing a newmarket. Charges of these expenses are

deferred because such expenses benefit more than one accountingperiod.
❖ Capital Receipts vs. Revenue Receipts - Receipts which are obtained in course
of normal business activities are revenue receipts (e.g. receipts from sale of goods
or services, interest income etc.). On the other hand, receipts which are not
revenue in nature are capital receipts (e.g. receipts from sale of fixed assets or
investments, secured or unsecured loans, owners’ contributions etc.).
❖ Financial Statements - Final Accounts or Financial Statements are the end

products of the financial accounting process which involves the preparation of a
summary of the accounts with a view to determine:
(a) net profit from the trading activities in terms of profit made or loss incurred for a
given period, and
(b) its financial position in terms of assets and liabilities as on the last date of the
given period.
(c) Financial Statements for sole trader comprise of Income Statement and Position
Statement.
❖ Income Statement - For the purpose of determining the profit or loss, a statement
known as Trading and Profit and Loss Account (Income Statement) is prepared
which incorporates all items of expenses and losses and all incomes and gains
occurring during the accounting period.

❖ Position Statement - In order to show the financial position on the last date of the
accounting period, another statement known as Balance Sheet (Position
Statement) is prepared which consists of all assets, liabilities and capital of the
business.
❖ Trading Account - Trading Account is the first part of income statement which is
prepared to ascertain the gross profit or gross loss for a given accounting period.
It shows the result of trading activities relating to purchases & sales of goods &
services. Trading account is prepared to calculate separately.

❖ Marshalling of Balance Sheet - The arrangement of assets and liabilities in
accordance with a particular order is known as marshalling of balance sheet. The
items in the balance sheet are generally marshalled in two ways-
(a) Liquidity order or according to time: In liquidity order, the assets are stated
in the order in which they can be easily converted into cash and the liabilities in
the order in which they have to be paid off.
(b) Permanence order or according to purpose: In permanence order, assets
which are to be used permanently in the business and are not meant for sale
are shown first and the assets that are liquid are shown last in order. Similarly,
liabilities may also be shown according to the permanence arrangement.
❖ Manufacturing Account - A manufacturing concern may like to ascertain the cost

of goods during the accounting period and may prepare Manufacturing Account
for this purpose. Manufacturing Account is debited with all expenses incurred in
the factory on production of goods. The total of such expenses plus cost of raw
material used gives cost of goods manufactured during the period. This is
transferred to Trading Account.

❖ Wasting Assets - Wasting Assets are those fixed assets which have a fixed
content, like coal in a coal mine; the value of the asset goes down as the contents
are taken out. When the minerals have been taken out totally, the mine will become
useless.
❖ Fictitious Assets - Fictitious Assets are valueless assets but shown as assets in
the financial statements (such as useless trade marks) or expenses treated as
assets (such as expenses incurred to establish a company i.e. preliminary
expenses).
❖ Contingent assets - Contingent assets usually arise from unplanned or other

unexpected events that give rise to the possibility of an inflow of economic benefits
to the enterprise. Contingent assets are not recognized in financial statements
since this may result in the recognition of income that may never be realised. It is
usually disclosed in the report of the approving authority where an inflow of
economic benefits is probable. Example: A potential settlement from a lawsuit or
legal processes.

❖ Contingent Liabilities – Contingent liabilities are liabilities that may or may not be
incurred by anentity depending on the outcome of a future event. The nature
andextent of the contingent liabilities is described in the footnote to the balance
sheet. Examples of contingent liabilities include outstanding lawsuit, bank
guarantee etc.
❖ Depreciation - Depreciation is a process of allocating the cost of a fixed asset

over its estimated useful life in a rational and systematic manner. A business
enterprise acquires different types of fixed assets. Whenever an asset is used in
business its value gets reduced and sooner or later the asset becomes useless.
Depreciation is a permanent, continuous and gradual shrinkage in the book value
of a fixed asset.
❖ Fixed Instalment Method or Straight Line Method: Under this method, a fixed
proportion of the original cost of the asset (less residual value) is written off each
year as follows:

❖ Depreciation Fund (Sinking Fund) Method - Under depreciation fund method,
funds are made available for the replacement of asset at the end of its useful life.
The amount of annual depreciation is invested outside the business every year in
good securities bearing interest at a specified rate. The aggregate amount of
interest and annual provision is invested every year. When the asset is completely
written off or is to be replaced, the securities are sold and money realised by selling
securities is used to replace the old asset.
❖ Insurance Policy Method - Under this method, the business takes an insurance
policy for required amount to replace the asset when it is worn out. A fixed amount
of premium is paid every year. At the end of the specified period, the insurance
company pays the agreed amount with which the new asset is purchased. The
annuity method considers that the business besides losing the original cost of the
asset also loses interest on the amount used for buying the asset, which would
have been earned in case the same amount would have been invested in some
other form of investment. The amount of depreciation is uniform and is determined
on the basis of annuity table.
❖ Diminishing Balance Method (Reducing Balance Method) - Under this method,

depreciation is calculated at a certain percentage each year on the balance of the
asset which is brought forward from the previous year. The amount of depreciation
charged for each period is not fixed but it goes on decreasing gradually as the
opening balance of the asset in each year will reduce.

❖ Sum of Years’ Digits Method - In this method, the charge for depreciation for an
accounting period is calculated in proportion of the remaining life of the asset at
the beginning of every accounting period. Depreciation goes on decreasing every
year. Following formula is used:
❖ Double Declining Balance Method - This method is similar to reducing balance

method explained above except that the rate of depreciation is double the straight
line rate.
❖ Depletion Method - This method is applicable in case of wasting assets, e.g.

mines, quarries, oil well etc. from which a certain quantity of output is expected to
be obtained. Under this, depreciation is charged on the basis of output extracted
in comparison with the estimated total contents of mine.
❖ Machine Hour Rate Method (Service Hours Method) - Under Machine hour rate
method, depreciation is allocated in proportion to the degree of asset used for
production. The useful life of the asset is fixed in terms of hours. This method of
depreciation can be charged on plant, machinery, vehicles etc.
❖ Partnership - Partnership is defined in Section 4 of the Indian Partnership Act,

1932 as “the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all”.
❖ Partnership Deed - A contract for partnership need not necessarily be in writing

although it is advisable to reduce it in writing to minimize the disputes among the
partners. But when the contract is put in black and white, the written contract is
called a partnership deed. It is a legal document signed by all the partners and
mostly contains the following: The name of the partners; name of the firm; nature
of the business to be carried on by the firm; the powers of the partners; when
termination is certain, the term of duration of partnership; the amount of capital to
be contributed by each partner, the restrictions on working of each partner;
methods of division of profits or losses; salary; commission, interest on capital etc.
payable to the partners; interest on drawings to be charged on withdrawals;
interest on loan payable to a partner; valuation of goodwill when there is a change
in the constitution of the firm; methods of accounting and the arbitration clause,
etc.

❖ Fixed Capital Account in Partnership - Under Fixed Capital Account method,
there will be two accounts for each partner, i.e.
(i) Partner’s Capital Account – recording only capital of the partner and
(ii) Partner’s Current Account – recording the transactions relating to drawings,
interest on capital, commission, salary, share of profit or loss, etc of the partner.
Under this method, capital accounts are not touched at all and debits and credits for
interest on capital, interest on drawings, profits, losses, drawings, etc., are made
in separate accounts called current accounts or drawing accounts. Capital account
is credited only when fresh (or further) capital is introduced or debited when capital
is withdrawn.
❖ Fluctuating Capital Account - Just as in a sole proprietorship concern, in

partnership also, profits or losses, drawings, interest on capital, interest on
drawings, salary (to partners), commission, additional capital introduced, etc., may
all be recorded in the capital accounts. Such capital accounts are called
Fluctuating Capital Accounts because the balances of these accounts continue to
fluctuate due to various debits and credits. Under this method, there is no need to
maintain respective current accounts because all transactions passing through
current accounts are passed through capital accounts.
❖ Goodwill - Goodwill is the value of reputation of a business house in respect of

the profits expected in future over and above the normal level of profits earned by
undertakings belonging to the same class of business. In other words, goodwill is
the present value of a firm’s anticipated super normal earnings. It is an attribute of
business which enables it to earn more than other firms in the industry. Goodwill
is an intangible asset but not a fictitious one.

❖ Super Profits - Super profit is the simple difference between future maintainable
operating profit and normal profit. Normal Profit is computed by multiplying the
Capital Employed with normal rate of return for the industry.
❖ Profit and Loss Appropriation Account - As against the proprietorship business,

the profits of the partnership firm are divided among partners in a given ratio. The
profit has to be divided among the partners in the agreed profit sharing ratio after
making necessary adjustments stated in the partnership deed such as interest on
capitals, interest on drawings, salaries or/commission to partners, etc. For this
purpose, an additional account is prepared, known as Profit and Loss
Appropriation Account in which the net profit is transferred from Profit and Loss
Account and necessary adjustments are made therein before the profit is divided
among the partners.
❖ Reconstitution of Partnership - When there is any change in the existing

agreement of partnership, it is reconstitution of partnership. As a result of
reconstitution, the existing agreement of partnership comes to an end and a new
agreement is formed. Following reasons may be responsible for reconstitution of
Partnership Firm:

(a) Change in the Profit Sharing Ratio
(b) Admission of a New Partner
(c) Retirement of a Partner
(d) Death of a Partner
❖ Sacrificing Ratio - In partnership business when a partner is admitted into a firm,

the old partners have to surrender a portion of their shares of profits in favour of
the new partner. Sacrificing ratio is the difference between old profit sharing ratio
and the new profit sharing ratio of the old partners. For example, if A and B share
profits in the ratio of 5:3 respectively and on admission of C the new ratio among
A, B and C is agreed upon as 7:5:4 respectively, the ratio of sacrifice will be
calculated as follows:
❖ Gaining Ratio - On retirement of a partner, the shares of profit to other partners

increase. In order to find ratio in which the remaining partners have gained, old
shares should bededucted from the new shares of remaining partners. Example:
If A, B and C share profits and losses in the ratio of 7:5:3 respectively and after
B’s retirement A and C decide to share profits and losses in the ratio of 3:2
respectively, then the ratio of gain will be calculated as follows:

❖ Memorandum Revaluation Account - A new partner is not to be benefitted by
any appreciation in the values of assets of the firm or by any decrease in the values
on liabilities of the firm. Therefore, before a new partner is admitted, the assets
and liabilities of the firm are revalued and any profit or loss resulting from such a
revaluation is transferred to old partners’ capital accounts in the old profit sharing
ratio. Sometimes, all the partners including the new partner may agree not to alter
the book value of assets and liabilities even when they agree to revalue them. In
order to record this, Memorandum Revaluation Account is opened.
❖ Hidden Goodwill - Sometime the value of goodwill on the admission of partner

has to be inferred from the agreement of capitals and profit sharing ratio among
the partners. Suppose, A and B share profits in the ratio 2:1 and their capitals stand
at ` 20,000 and ` 10,000 and they admit C who brings ` 14,000 and is given 1/4th
share in future profits. Now C’s capital should be 1/4th of the total capital.
For 1/4th share, the capital of C = `14000
Therefore, total capital of the firm should be = ` 56,000
Total capital of A, B and C= `20,000 + `10 000 + `14,000 = `44,000
Value of Goodwill = Total Estimated Capital- Actual Capital = ` 56,000 - `44,000 = `12,000
❖ Joint Life Policy - Partners often take out a joint life policy to provide funds for
settling the claim of the deceased partner. Annual premium is paid by the firm and
on the death of a partner, the amount of the policy is received by the firm from the
insurance company.
❖ Dissolution of Firm - Dissolution of a firm means that the business of the firm is
put to an end, assets are disposed of, liabilities are paid off, and the accounts of
all the partners are also settled. Dissolution of partnership does not necessarily
mean dissolution of firm. In case of dissolution of firm, the firm ceases to continue
its business i.e. the business comes to an end.
❖ Dissolution of Partnership - A partnership is dissolved on the expiry of the term

or on the completion of the specified venture, death, retirement or insolvency of a
partner. However if the remaining partners decide to continue to run the business,
the partnership firm is not dissolved. If they do not continue, then the firm is also
dissolved automatically.

❖ Realisation Account - On dissolution, the books of accounts of the partnership
firm are closed. “Realisation Account” is opened and transfer to it all the assets
except cash in hand and at bank. Realisation Account is credited with all liabilities
to outsiders and provisions against assets. Realisation Account will also be
credited with the actual amount realised by sale of assets. Profit or loss revealed
by Realisation Account is transferred to all the partners’ capital accounts in their
profit sharing ratio.
❖ Garner vs. Murray Case - In dissolution, if the capital account of a partner shows
a debit balance, he will have to pay the amount to the firm. But if he is insolvent,
he will not be able to do so.
According to the decision in Garner v. Murray, in case of insolvency of a partner:
o first, the solvent partners should bring in cash equal to their respective
shares of the loss on realisation, and
o then, the loss due to the insolvency of a partner should be divided among
the other partners in the ratio of capitals then standing.
o The effect of this decision practically is that the deficiency in the capital
account of the insolvent partner has to be borne by the solvent partners in
the ratio of capitals standing just prior to dissolution.

❖ Share Capital of Company - The company form of business organization is a
voluntary association of persons to carry on a business. It is an association of
persons who generally contribute money for some common purpose. The money
so contributed is the capital of the company. The total share capital is divided into
a number of units known as ‘shares’.
❖ Equity Share Capital – Equity shares are the main source of finance of a firm. It
is issued to the general public. Equity share-holders do not enjoy any preferential
rights with regard to repayment of capital and dividend. They are entitled to
residual income of the company, but they enjoy the right to control the affairs of
the business and all the shareholders collectively are the owners of the company.
❖ Nominal or Authorized Capital: It refers to that amount which is stated in the

Memorandum of Association (MoA) as the share capital of the company. The
company is registered with this amount of capital. This is the maximum limit of
capital which the company is authorized to issue without amending its MoA.
❖ Issued Capital: It refers to that part of the authorized capital of the company which
has actually been offered to the public for subscription in cash and the shares
allotted to vendors/promoters for consideration other than cash. It sets the limit of
the capital available for subscription.
❖ Subscribed Capital: It refers to that part of the issued capital which has actually
been subscribed by the public and subsequently allotted to them by the directors
of the company which are fully paid or partially paid.
❖ Called up Capital: It is that portion of the subscribed capital which the

shareholders are called upon to pay on the shares allotted to them.
❖ Paid-up Capital: It refers to that part of the called up capital which has actually
been paid by the shareholders
❖ Allotment of Shares: Allotment means the appropriation of a certain number of

shares to an applicant in response to his share application. The company cannot
allot more than the number of shares offered to the public for subscription through
the prospectus.
❖ Minimum Subscription: If the number of shares applied for is less than the
number of shares offered, the allotment can be only for the shares applied for

provided minimum subscription is raised. The minimum subscription is 90% of the
issued amount.
❖ Over Subscription: When the number of shares applied for exceeds the number
of shares issued, the shares are said to be oversubscribed. In such a situation, the
directors allot shares on some reasonable basis. In case of pro-rata allotment, no
applicant for shares is refused and no applicant is allotted the shares in full. Each
applicant receives the shares in some proportion. The excess amount of
application money (i.e. overpaid amount) is not refunded but retained and treated
as a payment towards allotment money.
❖ Securities Premium - The shares of many successful companies which offer

attractive rates of dividend on their existing capitals fetch a higher price than their
face value in the market. When shares are issued at a price higher than the face
value, they are said to be issued at a premium. Thus, the excess of issue price
over the face value is the amount of premium. For example, if a share of Rs. 10
is issued at Rs. 12, Rs. (12 – 10) = Rs. 2 is the premium.
❖ Companies Act on Securities Premium – Companies Act requires that when a

company issues shares at a premium whether for cash or otherwise, a sum equal
to the aggregate amount of the premium collected on shares must be credited to
a separate account called “Securities Premium Account” which is shown
separately in the liabilities side of the balance sheet under the head “Reserves &
Surplus”.
❖ Calls in Advance - If authorised by the articles, a company may receive from a

shareholder the amount remaining unpaid on shares, even though the amount has
not been called up. This is known as calls-in-advance. The amount received as
calls-in-advance is a debt of the company, the company is liable to pay interest on
the amount of Calls-in-Advance from the date of receipt of the amount till the date
when the call is due for payment. If the articles do not contain such rate, Table A
will be applicable which leaves the matter to the Board of directors subject to a
maximum rate of 12% p.a.
❖ Calls in Arrear - When calls are made upon shares allotted, the shareholders
holding the shares are bound to pay the call money within the date fixed for such
payment. If a shareholder makes a default in sending the call money within the
appointed date, the amount thus failed is called Calls-in-Arrear. The interest on
Calls-in-Arrear is recoverable according to the provisions in this regard in Articles

of the company. But if the Articles are silent, Table ‘F’ shall be applicable which
prescribes the rate not exceeding 10% per annum.
❖ Issue of Shares to Promoters - A company may allot fully paid shares to

promoters or any other party for the services rendered by them by way of furnishing
technical information, engineering services, plant layout, drawing and designing,
etc. without payment. As the amount paid to promoters for services rendered by
them is to be utilised by the company over a long period of time, such expenditure
should be treated as capital expenditure and debited to Goodwill Account.
❖ Forfeiture of Shares - If a shareholder fails to pay the allotment money and/or

calls made on him, his shares are liable to be forfeited. Forfeiture of shares may
be said to be the compulsory termination of membership by way of penalty for non-
payment of allotment and/or any call money. The effect of forfeiture of shares is
that the defaulting shareholder loses all his rights in the shares and ceases to be
a member. The name of the shareholder is removed from the Register of Members
and the amount already paid by him is forfeited.
❖ Preference Shares - A company limited by shares may, if so authorised by its

articles, issue preference shares which are liable to be redeemed within a period
not exceeding twenty years from the date of their issue. A company may issue
preference shares for a period exceeding 20 years but not exceeding 30 years for
infrastructure projects. No company limited by shares shall, can issue any
preference shares which are irredeemable.
❖ Capital Redemption Reserve - If preference shares are proposed to be

redeemed out of the profits of the company, a sum equal to the nominal amount of
the shares to be redeemed, shall be transferred to a reserve called the Capital
Redemption Reserve Account out of the profits of the company.
❖ Debentures - Besides raising capital by the issue of shares, a company may

supplement its capital by borrowings. Debentures are an important source of long
term borrowings of the company. The procedure for issuing debentures by a
company is very much similar to that of an issue of shares.

❖ Debenture Redemption Reserve (DRR) - Sec. 71(4) of the Companies Act, 2013
requires the companies which issues debentures to create a reserve out of their
divisible profits at least equal to 25% of the nominal value of debentures issued,
before the start of redemption. This reserve is called Debenture Redemption
Reserve. It is not necessary to create reserve in one go only. The company could
credit some amount to this reserve every year. Companies’ rules also require the
companies creating DRR to deposit or invest before 30th April at least 15% of
debentures to be redeemed up to 31st March of the next year.
❖ Debentures issued as Collateral Security - The term ‘Collateral Security’ implies

additional security given for a loan. Where a company obtains a loan from a bank
or insurance company, it may issue its own debentures to the lender as collateral
security. In case the loan is not repaid by the company on the due date or in the
event of any other breach of agreement, the lender has the right to retain these
debentures and to realise them.
❖ Amalgamation - In an amalgamation, two or more companies are combined

into one by merger or by one taking over the other. Therefore, the term
‘amalgamation’ contemplates two kinds of activities: (i) two or more companies join
to form a new company or (ii) absorption and blending of one by the other. Thus,
amalgamation include absorption.
The purpose of companies joining together is to secure various advantages such

as economies of large scale production, avoiding competition, increasing
efficiency, expansion etc.

❖ Vendor and Vendee Companies - The companies going into liquidation or
merged companies are called vendor companies or transferor companies. The
new company which is formed to take over the liquidated companies or the
company with which the transferor company is merged is called transferee or
vendee.In the case of amalgamation the assets and liabilities of transferor
company(s) are amalgamated and the transferee company becomes vested with
all such assets and liabilities.
❖ External Reconstruction - Wherever an undertaking is being carried on by a

company and is in substance transferred, not to an outsider, but to another
company consisting substantially of the same shareholders with a view to its being
continued by the transferee company, there is external reconstruction.
❖ AS – 14 - The Institute of Chartered Accountants of India has introduced

Accounting Standard -14 (AS 14) on ‘Accounting for Amalgamations’. The
standard recognizes two types of amalgamation – Amalgamation in the nature of
merger and amalgamation in the nature of purchase.
❖ Amalgamation in the nature of merger – It is an amalgamation where there is a

genuine pooling not merely of assets and liabilities of the transferor and transferee
companies but also of the shareholders’ interests and of the businesses of the
companies. Amalgamation in the nature of merger as per AS- 14 satisfies all the
following conditions:
• All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company.
• Shareholders holding not less than 90% of the face value of the equity shares
of the transferor company become equity shareholders of the transferee
company.
• The consideration for the amalgamation is discharged by the transferee
company wholly by the issue of equity shares in the transferee company,
except that cash may be paid in respect of any fractional shares.
• The business of the transferor company is intended to be carried on, after
the amalgamation, by the transferee company.
• No adjustment is intended to be made to the book values of the assets and
liabilities of the transferor company except to ensure uniformity of accounting
policies.

❖ Amalgamation in the nature of purchase - If any one or more of the above
conditions are not satisfied in an amalgamation, such amalgamation is called
amalgamation in the nature of purchase.
❖ Purchase Consideration – Purchase Consideration is the price payable by the

transferee company to the transferor company for taking over the business of the
transferor company. It is made in the form of cash or other assets by the transferee
company to the shareholders of the transferor company. It is notable that purchase
consideration does not include the sum which the transferee company will directly
pay to the debenture holders or creditors of the transferor company.
❖ Pooling of Interests Method – This accounting method is used in the case of

amalgamation in the nature of merger. Under this method, the assets, liabilities
and reserves of the Transferor Company will be taken over by Transferee
Company at existing carrying amounts unless any adjustment is required due to
different accounting policies followed by these companies. Any difference between
the amount of purchase consideration vis-à-vis the value of the net assets of the
transferor company should be adjusted in reserves.
❖ Purchase Method – This accounting method is used when the amalgamation is

in the nature of purchase. Under this method, assets and liabilities of the transferor
company should be incorporated at their existing carrying amounts or the purchase
consideration should be allocated to individual identifiable assets and liabilities on
the basis of their fair values at the date of amalgamation. No reserves, other than
statutory reserves, of the transferor company should be incorporated in the
financial statements of transferee company. Any differences in the amount of
purchase consideration vis-à-vis the value of the net assets of the transferor
company is shown as Goodwill or Capital Reserve.
❖ Amalgamation Adjustment Reserve A/c - Normally, in an amalgamation in the

nature of purchase, the identity of reserves is not preserved, an exception is made
in respect of statutory reserves. The statutory reserves are recorded in the
financial statements of the transferee company by a corresponding debit to
Amalgamation Adjustment Reserve A/c.
❖ Internal Reconstruction - When a company has been making losses for a

number of years, the financial position does not present a true and fair view of the
state of the affairs of the company. Internal Reconstruction is a process by which
affairs of a company are reorganized by revaluation of assets, reassessment of

liabilities and by writing off the losses already suffered by reducing the paid up
value of shares and/or varying the rights attached to different classes of shares.
❖ Capital Reduction A/c - Generally reduction in share capital is followed when a

company has been suffering losses continuously for a long time, is not truly
represented by its assets. This reduction is a sacrifice by the shareholders and the
amount of reduction or sacrifice is credited to a new account called Capital
Reduction Account (or Reconstruction Account).
❖ Surrender of Shares - In this method for internal reconstruction, shares are

divided into shares of smaller denominations and then the shareholders are made
to surrender their shares to the company. These shares are then allotted to
debenture holders and creditors so that their liabilities are reduced. The unutilized
surrendered shares are then cancelled by transeferred to Reconstruction Account.
❖ Liquidation of Companies - Liquidation is the legal procedure by which the

company comes to an end. Thus a company being a creation of law cannot die a
natural death. A company, when found necessary, can be liquidated.
❖ Winding up of Companies – The winding up or liquidation of a company is the

process by which a company's assets are collected and sold in order to pay its
debts.

❖ Liquidator’s Statement of Account - In case of Compulsory winding-up of
company, the Company Liquidator should keep proper books in such manner, as
may be prescribed, in which he should cause entries or minutes to be made of
proceedings at meetings and of such other matters as may be prescribed. Any
creditor or contributory may, subject to the control of the Tribunal, inspect any such
books, personally or through his agent. While preparing the liquidator’s statement
of account, receipts and payments are shown in a prescribed order.

❖ Statement of Affairs - In case of winding up by Tribunal, Companies Act, 2013
provides that a petition presented by the company for winding up before the
Tribunal shall be admitted only if accompanied by a statement of affairs in such
form and in such manner as may be prescribed. This statement gives the detail of
assets and liabilities of the company.
❖ Deficiency Account - The official liquidator will specify a date for period (minimum
three years) beginning with the date on which information is supplied for
preparation of an account to explain the deficiency or surplus. On that date either
assets would exceed capital plus liabilities, that is, there would be a reserve or
there would be a deficit or debit balance in the Profit and Loss Account. The
Deficiency account is divided into two parts:
The first part starts with the deficit (on the given date) and contains every item that
increases deficiency (or reduces surplus such as losses, dividends etc.).
The second part starts with the surplus on the given date and includes all profits.If
the total of the first exceeds that of the second, there would be a deficiency to the
extent of the difference, and if the total of the second part exceeds that of the first,
there would be a surplus.

❖ Overriding Preferential Payments - In the winding up of a company under this
Act, the following debts should be paid in priority to all other debts,
o workmen’s dues; and

o where a secured creditor has realized a secured asset, so much of the debts
due to such secured creditor as could not be realized by him or the amount
of the workmen’s portion in his security (if payable under the law), whichever
is less, paripassu with the workmen’s dues:
Example: The value of the security of a secured creditor of a company is ` 1,00,000.

The total amount of the workmen’s dues is ` 1,00,000. The amount of the debts
due from the company to its secured creditors is `3,00,000. The aggregate of the
amount of workmen’s dues and the amount of debts due to secured creditors is `
4,00,000. The workmen’s portion of the security is, therefore, one-fourth of the
value of the security, that is ` 25,000.
❖ Preferential Payments - In a winding up they should be paid in priority to all other

debts subject to the provisions of section 326 (Overriding Preferential Payments).
The debts enumerated in this section should a. rank equally among themselves
and be paid in full, unless the assets are insufficient to meet them, in which case
they should abate in equal proportions.

❖ B List Contributories - Shareholders who had transferred Partly Paid Shares
(otherwise than by operation of law or by death) within one year, prior to the date
of winding up may be called upon to pay an amount to pay off such Creditors as
existed on the date of transfer of shares. These Transferors are called as B List
Contributories. Their liability is restricted to the amount not called up when the
shares were transferred.
❖ Holding company - A holding company is one which directly or indirectly acquires

either all or more than half the number of Equity shares in one or more companies
so as to secure a controlling interest in such companies, which are then known as
subsidiary companies. Holding companies are able to nominate the majority of the
directors of subsidiary company and therefore control such companies.
❖ Consolidated financial statements - Consolidated financial statements are the

financial statements of a group in which assets, liabilities, equity, income,
expenses and cash flows of the parent and its subsidiaries are presented as those
of a single economic entity.

❖ How does Consolidated Balance Sheet look like?

❖ Accounting Standards dealing with Holding Company Accounts: Under the
Companies (Accounting Standards) Rules 2006, Accounting Standard (AS) 21 :
Consolidated Financial Statements dealt with preparation of Holding-Subsidiary
Accounts. Under Ind AS, the guidance is much more detailed. As per the
Companies (Indian Accounting Standards) Rules 2015, Indian Accounting
Standard (Ind AS) 110 : Consolidated Financial Statements deals with such
aspects. The objective of Ind AS 110, Consolidated Financial Statements, is to
establish principles for the presentation and preparation of consolidated financial
statements when an entity controls one or more entities.
❖ Cost of Control - If H (Holding) Ltd purchases the shares of S (Subsidiary) Ltd at

a higher price than their actual value, the excess payment is known as cost of
control or good will (Loss on purchase of shares of S Ltd). On the other hand, if
the shares are purchased at a lower price than their actual value, the extent of
lower payment is known as capital reserve (profit on purchase of shares of S Ltd).

❖ Minority Interest - Minority interest represents the claims of the outside
shareholders of a subsidiary. As per AS 21, minority interests in the net assets of
consolidated subsidiaries should be identified and presented in the consolidated
balance sheet separately from liabilities and the equity of the parent’s
shareholders.
Minority Interest = Share Capital of subsidiary related to outsiders + Minority interest

in reserves and profits of subsidiary company
❖ Pre and Post Acquisition Profits - For the purpose of consolidated balance sheet
preparation, all reserves and profits (or losses) of subsidiary company should be
classified into pre and post- acquisition reserves and profits (or losses). Profits (or
losses) earned (or incurred) by subsidiary company upto the date of acquisition of
the shares by the holding company are pre acquisition or capital profits (or loss).
The holding company’s interest in the pre-acquisition reserves and profits (or
losses) should be adjusted against cost of control to find out goodwill or capital
reserve on consolidation.
❖ Dividend received from subsidiary company - The holding company, when it

receives a dividend from a subsidiary company, must distinguish between the part
received out of capital profits and that out of revenue profits - the former is credited
to Investment Account, it being a capital receipt, and the later is adjusted as
revenue income for being credited to the Profit & Loss Account.
❖ Intra-group transactions – Intra-group transactions refer to the transactions

between holding and subsidiary company. In order to present financial statements
for the group in a consolidated format, the effect of transactions between group
enterprises should be eliminated. AS 21 states that intragroup balances and
intragroup transactions and resulting unrealised profits should be eliminated in full.
❖ Upstream and downstream transactions - Upstream transaction is a transaction

in which the subsidiary company sells goods to holding company. While in the
downstream transaction holding company is the seller and subsidiary company is
the buyer.

Done Reading !!!
Practice Free MCQs on this Unit
Visit www.everstudy.co.in

Abcds

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Abcds

Uploaded by

Copyright:

Available Formats

EVERSTUDY CLASSES

Unit II Part 1 (Financial Accounting)

Objectives of this Document

❖ Book-Keeping - Book-keeping is a part of accounting and is concerned with the

❖ Accountancy - Although in practice Accountancy and Accounting are used

❖ Accounting as Science - Science is a systematised body of knowledge. It

❖ Accounting as Art - Art requires a perfect knowledge, interest and experience to

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Mercantile system of Accounting - Under this system all transactions relating to

❖ Accounting Equation – It describes the relationship between assets, liabilities

❖ Accounting Principles - Financial statements are the product of a process in

❖ Generally Accepted Accounting Principles (GAAP) - GAAP is a cluster of

(a) Properly organize their financial information into accounting records;

❖ Accounting Concepts - The term ‘Concept’ is used to connote the accounting

❖ Accounting Conventions - The term ‘convention’ is used to signify customs or

❖ Separate Business Entity Concept - In accounting we make a distinction

❖ Money Measurement Concept - In accounting, only those business transactions

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Cost Concept - According to this concept an asset is ordinarily entered on the

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Accrual Concept – Accrual concept is the most fundamental principle of

❖ Materiality Convention - Materiality concept states that items of small

❖ Conservatism Convention - According to this convention, revenues or gains

❖ Consistency Convention - The convention of consistency requires that once a

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Accounting Standards Board - In order to harmonise varying accounting policies

❖ Accounting Standards vis-à-vis Ind AS -

www.everstudy.co.in Query: everstudyclasses@gmail.com

(a) Natural Personal Accounts : Accounts of individuals (natural persons) such

❖ Real Account - Real accounts are the accounts related to assets/properties.

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Journal - Journal is the book of primary entry in which every transaction is

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Subsidiary Books of Accounts - It is not advisable to record all transactions in

www.everstudy.co.in Query: everstudyclasses@gmail.com

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Ledger - Ledger is the principal book of accounts where similar transactions

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Balancing of an account – It is the process of equalizing the two sides of an

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Errors of omission - When business transaction is either completely or partly

❖ Compensating errors - compensating errors are those errors, which cancel or

❖ Capital Expenditure vs. Revenue Expenditure - Capital expenditure contributes

❖ Deferred Revenue Expenditure - There are certain expenses which may be in

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Financial Statements - Final Accounts or Financial Statements are the end

www.everstudy.co.in Query: everstudyclasses@gmail.com

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Manufacturing Account - A manufacturing concern may like to ascertain the cost

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Contingent assets - Contingent assets usually arise from unplanned or other

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Depreciation - Depreciation is a process of allocating the cost of a fixed asset

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Diminishing Balance Method (Reducing Balance Method) - Under this method,

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Double Declining Balance Method - This method is similar to reducing balance

❖ Depletion Method - This method is applicable in case of wasting assets, e.g.

❖ Partnership - Partnership is defined in Section 4 of the Indian Partnership Act,

❖ Partnership Deed - A contract for partnership need not necessarily be in writing

www.everstudy.co.in Query: everstudyclasses@gmail.com

❖ Fluctuating Capital Account - Just as in a sole proprietorship concern, in

❖ Goodwill - Goodwill is the value of reputation of a business house in respect of

www.everstudy.co.in Query: everstudyclasses@gmail.com