Double entry system

Double-entry bookkeeping, also known as, double-entry accounting, is a

method of bookkeeping that relies on a two-sided accounting entry to maintain
financial information. Every entry to an account requires a corresponding and
opposite entry to a different account. The double-entry system has two equal
and corresponding sides known as debit and credit. A transaction in double-
entry bookkeeping always affects at least two accounts, always includes at least
one debit and one credit, and always has total debits and total credits that are
equal.

Profit and Loss Appropriation Account

It is a special account that a firm prepares to show the distribution of
profits/losses among the partners or partner’s capital. This account should not
be confused with the typical Profit and Loss Account but rather seen as an
extension of it as it is made after making the Profit and Loss Account. Profit
and Loss Appropriation Account is a nominal account prepared for the purpose
of distributing profits/losses among the partners after making all the
adjustments relating to Interest on Capitals, Interest on Drawings,
Salary/commission to partners and transfer to Reserve. It is an extension of
Profit and Loss Account. It contains the items relating only to the partners'
claim.

Trend analysis
Trend analysis is an analysis of the trend of the company by comparing its
financial statements to analyze the trend of market or analysis of the future
based on results of past performance and it’s an attempt to make the best
decisions based on results of the analysis done. Trend analysis involves
collecting the information from multiple periods and plotting the collected
information on the horizontal line with the objective of finding actionable
patterns from the given information. In Finance, Trend Analysis is used for
technical analysis and accounting analysis of stocks.
Flow of funds
Fund flow is the sum of all cash inflows/outflows from and into different
financial assets. Fund flow is usually calculated on a monthly or quarterly
basis; no account is taken of the output of an asset or fund. It is only the share
redemptions or outflows, and share purchases or inflows.
Net inflows produce excess cash for investment managers, which in turn
increases the demand for securities such as stocks and bonds.
Fund flow is centred only on cash movement, indicating the net movement
after evaluating monetary fund inflows and outflows. Such transactions may
include investor payments or payments made to the company in exchange for
goods and services.

Fixed Cost
In accounting, fixed costs, also known as indirect costs or overhead costs, are
business expenses that are not dependent on the level of goods or services
produced by the business. They tend to be recurring, such as interest or rents
being paid per month. These costs also tend to be capital costs. This contrasts
with variable costs, which are volume-related (and are paid per quantity
produced) and unknown at the beginning of the accounting year. Fixed costs
have an effect on the nature of certain variable costs.

Liquidity ratio
It’s a ratio that tells one’s ability to pay off its debt as and when they become
due. In other words, we can say this ratio tells how quickly a company can
convert its current assets into cash so that it can pay off its liability on a timely
basis. Generally, Liquidity and short-term solvency are used together.
Current Ratio
This ratio measures the financial strength of the company. Generally, 2:1 is
treated as the ideal ratio, but it depends on industry to industry.
Formula: Current Assets/ Current Liability, where Current Assets = Stock,
debtor, cash and bank, receivables, loan and advances, and other current assets.
Current Liability = Creditor, short-term loan, bank overdraft, outstanding
expenses, and other current liability.
Acid Test Ratio or Quick Ratio
This ratio is the best measure of liquidity in the company. This ratio is more
conservative than the current ratio. The quick asset is computed by adjusting
current assets to eliminate those assets which are not in cash.
Formula: Quick Assets/ Current Liability, where, Quick Assets = Current
Assets – Inventory – Prepaid Expenses

WDV method of depreciation

Written Down Value method is a depreciation technique that applies a constant
rate of depreciation to the net book value of assets each year, thereby
recognizing more depreciation expenses in the early years of the life of the
asset and less depreciation in the later years of the life of the asset. In short, this
method accelerates the recognition of depreciation expenses systematically and
helps businesses recognize more depreciation in the early years. It is also
known as Diminishing Balance Method or Declining Balance Method.
The formula is as follows:
Written Down Value Method = (Cost of Asset – Salvage Value of the Asset) *
Rate of Depreciation in %

Funds from Operations

In simple terms, FFO is the cash flow generated by a company through its
business operations. When you reduce expenses from the revenues, you get net
profit. However, this profit is derived after considering non-operating incomes
and expenses (or incomes and expenses not related to a business’s core
activities). For example, for a company selling jewellery, income from
investments, or a one time sale of a fixed asset could be considered non
operating income.
International Financial Reporting Standards
The International Financial Reporting Standards (IFRS) are accounting
standards that are issued by the International Accounting Standards Board
(IASB) with the objective of providing a common accounting language to
increase transparency in the presentation of financial information.

Matching Concept of Accounting Principle

The matching principle is an accounting concept that dictates that companies
report expenses at the same time as the revenues they are related to. Revenues
and expenses are matched on the income statement for a period of time (e.g., a
year, quarter, or month).
Market Capitalisation Ratio
Market capitalization is the aggregate valuation of the company based on its
current share price and the total number of outstanding stocks. It is calculated
by multiplying the current market price of the company's share with the total
outstanding shares of the company.

Gross working capital

Gross working capital is the sum of a company's current assets (assets that are
convertible to cash within a year or less). Gross working capital includes assets
such as cash, accounts receivable, inventory, short-term investments, and
marketable securities.

Angle of incidence on BEP

Angle of incidence (0) is the angle between the total cost line and the total
sales line. If the angle is large, the firm is said to make profits at a high rate and
vice-versa. A high angle of incidence and a high margin of safety indicate
sound business conditions.
Accounting Concepts

• Business entity concept: A business and its owner should be treated

separately as far as their financial transactions are concerned.
• Money measurement concept: Only business transactions that can be
expressed in terms of money are recorded in accounting, though records
of other types of transactions may be kept separately.
• Dual aspect concept: For every credit, a corresponding debit is made.
The recording of a transaction is complete only with this dual aspect.
• Going concern concept: In accounting, a business is expected to
continue for a fairly long time and carry out its commitments and
obligations. This assumes that the business will not be forced to stop
functioning and liquidate its assets at “fire-sale” prices.
• Cost concept: The fixed assets of a business are recorded on the basis of
their original cost in the first year of accounting. Subsequently, these
assets are recorded minus depreciation. No rise or fall in market price is
taken into account. The concept applies only to fixed assets.
• Accounting year concept: Each business chooses a specific time period
to complete a cycle of the accounting process—for example, monthly,
quarterly, or annually—as per a fiscal or a calendar year.
• Matching concept: This principle dictates that for every entry of revenue
recorded in a given accounting period, an equal expense entry has to be
recorded for correctly calculating profit or loss in a given period.
• Realisation concept: According to this concept, profit is recognised only
when it is earned. An advance or fee paid is not considered a profit until
the goods or services have been delivered to the buyer.
Depreciation
Depreciation is the process of deducting the total cost of something expensive
you bought for your business. But instead of doing it all in one tax year, you
write off parts of it over time. When you depreciate assets, you can plan how
much money is written off each year, giving you more control over your
finances.
Causes of Depreciation
• Wear and Tear
• Perishability
• Usage Rights
• Natural Resource Usage
• Inefficiency/Obsolescence

Common depreciation methods include:

• Straight-line
Straight-line depreciation is a very common, and the simplest, method of
calculating depreciation expense. In straight-line depreciation, the
expense amount is the same every year over the useful life of the asset.
Depreciation Expense = (Cost – Salvage value) / Useful life
• Double declining balance
Compared to other depreciation methods, double-declining-balance
depreciation results in a larger amount expensed in the earlier years as
opposed to the later years of an asset’s useful life. The method reflects
the fact that assets are typically more productive in their early years than
in their later years – also, the practical fact that any asset (think of buying
a car) loses more of its value in the first few years of its use. With the
double-declining-balance method, the depreciation factor is 2x that of the
straight-line expense method.
Periodic Depreciation Expense = Beginning book value x Rate of
depreciation
• Units of production
• Sum of years digits
Financial Accounting
Financial accounting is a specific branch of accounting involving a process of
recording, summarizing, and reporting the myriad of transactions resulting
from business operations over a period. These transactions are summarized in
the preparation of financial statements, including the balance sheet, income
statement and cash flow statement, that record the company's operating
performance over a specified period.

Cost Accounting
Cost accounting is a process of recording, analyzing and reporting all of a
company’s costs (both variable and fixed) related to the production of a
product. This is so that a company’s management can make better financial
decisions, introduce efficiencies and budget accurately. The objective of cost
accounting is to improve the business’s net profit margins (how much profit
each dollar of sales generates).

Financial accounting Cost accounting

Provides information to external Provides information to
users internal users
Produces general purpose financial Produces special statements
and reports
statements
Must confirm to generally accepted Must conform to
information needs of
accounting principles management
Provides accounting data in Provides accounting data
monetary terms in monetary and non-
monetary terms
Cash inflows
Cash inflow is the money going into a business. That could be from sales,
investments, or financing. It's the opposite of cash outflow, which is the money
leaving the business. A business is considered healthy if its cash inflow is
greater than its cash outflow.
Cash outflow
Cash outflow is any money leaving a business. This could be from paying staff
wages, the cost of renting an office or from paying dividends to shareholders.
It's the opposite of cash inflow, which is the money going into the business. A
business is considered unhealthy if its cash outflow is greater than its cash
inflow.

Distinguish Cash Flow Analysis and Funds Flow Analysis

1. The concept of fund refers to actual or notional ‘cash’ under Cash Flow
Analysis. But it means either all financial resources or net working capital in
Funds Flow Analysis.
2. Cash flow analysis deals with the movement of only actual or notional cash.
But funds flow is concerned with all the items constituting funds i.e., net
working capital. Cash is one of the components of working capital.
3. Cash flow statements show the causes for the change in cash and bank
balances i.e., cash receipts and cash payments alone. Funds flow statement
shows the causes for the change in net working capital. It is a flexible device
designed to disclose and emphasize all significant changes in the current
assets and current liabilities of the firm during the period under study.
4. Cash flow analysis is a tool of short-term financial analysis while the funds
flow analysis is comparatively a long-term one.
5. Funds flow statement is in consonant with the actual basis of accounting.
But in cash flow statement, the data obtained on accrued basis is converted
into cash basis.
6. Funds flow statement tallies the funds generated from various sources with
the various uses to which they are put. But cash flow statement starts with
the opening cash balance and reaches to the closing cash balance by
processing through various sources and uses.
Management Accounting
The process of creating organization goals by identifying, measuring,
analyzing, interpreting, and communicating information to managers is call
management or managerial accounting.
Management accounting focuses on all accounting aimed at informing
management about operational business metrics. It uses information relating to
costs of products or services purchased by the company. Budgets are often
used to quantify the decisions made in operational planning. Management
accountants use performance reports to note variances between actual results
from budgets.
Management accounting Functions
1. Helping Forecast the Future
2. Helping in Make-or-buy Decisions
3. Forecasting Cash Flows
4. Helping Understand Performance Variances
5. Analyzing the Rate of Return

Fund flow statement

A fund flow statement is a statement prepared to analyse the reasons for
changes in the financial position of a company between two balance sheets. It
portrays the inflow and outflow of funds i.e. sources of funds and applications
of funds for a particular period.
1. The users of fund flow statement, such as investors, creditors, bankers,
government, etc., can understand the managerial decisions regarding
dividend distribution, utilization of funds and earning capacity with the help
of fund flow statement.
2. The quantum of working capital is revealed by the schedule of working
capital changes, which is a part of fund flow statement.
3. The fund flow statement is the best and first source for judging the repaying
capacity of an enterprise.
4. The management will be able to detect surplus/shortage of fund balance.
5. The fund from operation is not mentioned in the profit and loss account and
balance sheet but it is separately calculated for the purpose of fund flow
statement.