Asset: In financial accounting, assets are economic
resources. Anything tangible or intangible that is
capable of being owned or controlled to produce value
and that is held to have positive economic value is
considered an asset. Simply stated, assets represent
value of ownership that can be converted
into cash (although cash itself is also considered an
asset)
In financial accounting, a liability is defined as
an obligation of an entity arising from past transactions
or events, the settlement of which may result in the
transfer or use of assets, provision of services or other
yielding of economic benefits in the future. Feature :
Any type of borrowing from persons or banks for
improving a business or personal income that is payable
during short or long time;. A duty or responsibility to
others that entails settlement by future transfer or use of
assets, provision of services, or other transaction
yielding an economic benefit, at a specified or
determinable date, on occurrence of a specified event, or
on demand;. A duty or responsibility that obligates the
entity to another, leaving it little or no discretion to
avoid settlement; and,. A transaction or event obligating
the entity that has already occurred.
In accounting and finance, equity is the residual
claimant or interest of the most junior class of investors
in assets, after all liabilities are paid. If liability exceeds
assets, negative equity exists. In an accounting
context, Shareholders' equity (or stockholders' equity,
shareholders' funds, shareholders' capital or similar
terms) represents the remaining interest in assets of a
company, spread among
individual shareholders of common orpreferred stock.
In accounting, expense has a very specific meaning. It is
an outflow of cash or other valuable assets from a person
or company to another person or company. This outflow
of cash is generally one side of a trade for products or
services that have equal or better current or future value
to the buyer than to the seller. Technically, an expense is
an event in which an asset is used up or a liability is
incurred. In terms of the accounting equation, expenses
reduce owners' equity.
In finance, gain is a profit or an increase in the value of
an investment such as a stock or bond. Gain is calculated
by fair market value or the proceeds from the sale of the
investment minus the sum of the purchase price and all
associated costs. If the investment is not converted into
cash or another asset, the gain is called
an unrealized gain.
Revenue : The amount of money that a company
actually receives during a specific period, including
discounts and deductions for returned merchandise. It is
the "top line" or "gross income" figure from which costs
are subtracted to determine net income.
CAMEL Rating: Measure of the relative soundness
of a bank. Camels ratings-the term stands
for Capital,
Assets management, earnings, Liquidity and sensiti
vity to market risk-are calculated on a 1-5 scale, and
are used by bank supervisory agencies to evaluate
bank condition. A rating of 1 is given to banks with
the strongest performance ratings; banks given a
CAMELS rating of 4 or 5 are placed on the watch
list of banks in need of supervisory attention.
Individual CAMELS ratings are disclosed to bank
management, though not to the general public.
International Financial Reporting Standards (IFRS)
are a set of accounting standards developed by the
International Accounting Standards Board (IASB)
that is becoming the global standard for the
preparation of public company financial statements.
International Financial Reporting Standards (IFRS)
are designed as a common global language for
business affairs so that company accounts are
understandable and comparable across international
boundaries. They are progressively replacing the
many different national accounting standards. The
rules to be followed by accountants to maintain
books of accounts which is comparable,
understandable, reliable and relevant as per the
users internal or external.
IAS: An older set of standards stating how
particular types of transactions and other events
should be reflected in financial statements. In the
past, international accounting standards (IAS) were
issued by the Board of the International Accounting
Standards Committee (IASC). Since 2001, the new
set of standards has been known as the international
financial reporting standards (IFRS) and has been
issued by the International Accounting Standards
Board (IASB). The IASB is an independent
accounting standard-setting body, based in London.
It consists of 15 members from nine countries,
including the United States. The IASB began
operations in 2001 when it succeeded the
International Accounting Standards Committee.
Basel Accord: A set of agreements set by the Basel
Committee on Bank Supervision (BCBS), which
provides recommendations on banking regulations
in regards to capital risk, market risk and
operational risk. The purpose of the accords is to
ensure that financial institutions have enough
capital on account to meet obligations and absorb
unexpected losses. First Basel accord is known as
BASEL-I was issued in 1988 and second BASEL-II
that is to be fully implemented by 2015.
Going Concern: A company is considered viable
and a “going concern” for the foreseeable future. In
other words, a corporation is assumed to remain in
existence for an indefinitely long time. Exxon
Mobil, for example, has existed since 1882, and
General Electric has been around since 1892; both
of these companies are expected to continue to
operate in the future. To assume that an entity will
continue to remain in business is fundamental to
accounting for publicly held companies.
Relevant cost(also called avoidable
cost or differential cost): A managerial accounting
term that is used to describe costs that are specific
to management's decisions. The concept of relevant
costs eliminates unnecessary data that could
complicate the decision-making process. Relevant
costs are those costs that will make a difference in a
decision. Relevant costs are future costs that will
differ among alternatives. Relevant costs are
expenses that need to be taken into consideration
when purchasing or planning to purchase certain
items.
Window dressing refers to actions taken or not
taken prior to issuing financial statements in order
to improve the appearance of the financial
statements. Window dressing is particularly
common when a business has a large number
of shareholders, so that management can give the
appearance of a well-run company to investors who
probably do not have much day-to-day contact with
the business
Assumption of CVP analysis: Cost–volume–
profit (CVP), in managerial economics, is a form
of cost accounting. 1. All costs can be classified as
fixed and variable. 2. Behavior or costs will be
linear within the relevant range. Difficulty of steps
fixed costs. 4. Selling price remains constant for any
volume. 5. There is no significant change in the size
of inventory. 6. Cost-volume-profit (CVP) analysis
applies only to a short-term time horizon
Limitation of CVP analysis: A number of
limitations are commonly mentioned with respect to
CVP analysis: 1. The analysis assumes a linear
revenue function and a linear cost function. 2. The
analysis assumes that what is produced is sold. 3.
The analysis assumes that fixed and variable costs
can be accurately identified. 4. For multiple-product
analysis, the sales mix is assumed to be known and
constant. 5. The selling prices and costs are
assumed o be known with certainty.
Generally Accepted Accounting Principles (GAAP)
refer to the standard framework of guidelines for
financial accounting used in any given jurisdiction;
generally known as accounting standards. GAAP
includes the standards, conventions, and rules
accountants follow in recording and summarizing, and in
the preparation of financial statements. Its contains –
assumption, principle, Constraint.
Sunk Cost: A cost that has already been incurred and
thus cannot be recovered. A sunk cost differs from other,
future costs that a business may face, such as inventory
costs or R&D expenses, because it has already
happened. Sunk costs are independent of any event that
may occur in the future. Two specific features
characterizing the sunk cost heuristic worth mentioning
are: 1. An overly optimistic probability bias, whereby
after an investment the evaluation of one's investment-
reaping dividends is increased. 2. The requisite of
personal responsibility. Sunk cost appears to operate
chiefly in those who feel personal responsibility for the
investments that are to be viewed as sunk cost.
Revenue Recognition. Accrual basis of accounting
dictates that revenues must be recorded when earned and
measurable. The revenue recognition principle is a
cornerstone of accrual accounting together with
matching. They both determine the accounting period, in
which revenues and expenses are recognized. According
to the principle, revenues are recognized when they are
realized or realizable, and are earned no matter when
cash is received. In cash accounting – in contrast –
revenues are recognized when cash is received no matter
when goods or services are sold. Cash can be received in
an earlier or later period than obligations are met (when
goods or services are delivered) and related revenues are
recognized that results in the following two types of
accounts: Accrued: Revenue is recognized before cash is
received. Deferred revenue: Revenue is recognized after
cash is received.
Adjustment entry: In accounting/accountancy, adjusting
entries are journal entries usually made at the end of an
accounting period to allocate income and expenditure to
the period in which they actually occurred. The revenue
recognition principle is the basis of making adjusting
entries that pertain to unearned and accrued revenues
under accrual-basis accounting. They are sometimes
called Balance Day adjustments because they are made
on balance day.
Adjustment entry: In accounting/accountancy, adjusting
entries are journal entries usually made at the end of an
accounting period to allocate income and expenditure to
the period in which they actually occurred. The revenue
recognition principle is the basis of making adjusting
entries that pertain to unearned and accrued revenues
under accrual-basis accounting. They are sometimes
called Balance Day adjustments because they are made
on balance day.
Whey adjustment entries: 1. Some events are not
journalized daily because it is inexpedient to do so .
Examples are the consumption if supplies and the
earning of wages by employees. 2. Some cost are not
journalizes during the accounting period because they
expire with the passage of time rather than through
recurring daily transaction, example are equipment
deterioration and rent and insurance. 3. Some items may
be unrecorded. An example is a utility service bill that
will not be received until the nest accounting period. It is
also required for adjusting of accrued revenue and
expenditure. Prepaid expanse and income, unearned
revenue, correcting the posting of error transaction.
Closing entries: A journal entry made at the end of the
accounting period. The closing entry is used to transfer
data in the temporary accounts to the permanent balance
sheet or income statement accounts. The purpose of the
closing entry is to bring the temporary journal account
balances to zero for the next accounting period, which
aids in keeping the accounts reconciled. All revenue
account , all expenditure account, and owners drawing
account
The sequence of the closing process and the
associated closing entries is: 1. Close revenue accounts
to income summary, by debiting revenue and crediting
income summary.
2. Close expense accounts to income summary, by
debiting income summary and crediting expense.
3. Close income summary to retained earnings, by
debiting income summary and crediting retained
earnings. 4. Close dividends to retained earnings, by
debiting retained earnings and crediting dividends.
Insurance company: prepared Revenue
account-profit of loss is not use in the revenue account.
In the revenue account start with the opening balance
fund in right side. And at the end the closing balance
write. In reality there is no loss in the revenue account. It
is always gain profit.
The economic entity assumption is a concept used in
accounting. It says that activities of the entity at hand are
to be kept separate from the activities of its own and all
other economic entities. Some examples of this are
hospitals, companies, municipalities, and federal
agencies. Economic entity assumption is an assumption
under the Generally Accepted Accounting Principles that
separates the stakeholders from the business itself. The
business is its own entity.
"The monetary unit assumption requires that
companies include in the accounting records only
transactions data that can be expressed in terms of
money. This assumption enables accounting to
quantify(measure) economic events. The monetary unit
assumption is vital to applying the cost principle. This
assumption prevents the inclusion of some relevant
information in the accounting records. For example, the
health of the owner, the quality of service, and the
morale of employees are not included. The reason:
Companies cannot quantify this information in terms of
money. Though this information is important, only
events that can be measured in money are recorded."
Generally Accepted Accounting Principles
(GAAP) refer to the standard framework of
guidelines for financial accounting used in any
given jurisdiction; generally known as
accounting standards. GAAP includes the
standards, conventions, and rules accountants
follow in recording and summarizing, and in the
preparation of financial statements.
Assumption 1: Accounting Entity: A company
is considered a separate “living” enterprise,
apart from its owners. In other words, a
corporation is a “fictional” being: It has a name.
It has a birth date and birthplace (referred to as
incorporation date and place, respectively). It is
engaged in clearly defined activities. It
regularly reports its financial health (through
financial reports) to the general public. It pays
taxes. It can file lawsuits.
Assumption 2: Going Concern A company is
considered viable and a “going concern” for the
foreseeable future. In other words, a corporation
is assumed to remain in existence for an
indefinitely long time. Exxon Mobil, for
example, has existed since 1882, and General
Electric has been around since 1892; both of
these companies are expected to continue to
operate in the future. To assume that an entity
will continue to remain in business is
fundamental to accounting for publicly held
companies.
Assumption 3: Measurement and Units of
Measure Financial statements have limitations;
they show only measurable activities of a
corporation such as its quantifiable resources,
its liabilities (money owed by it), amount of
taxes facing it, and so forth. For example,
financial statements
Assumption 4: Periodicity A continuous life of
an entity can be divided into measured periods
of time, for which financial statements are
prepared. U.S. companies are required to file
quarterly (10-Q) and annual (10-K) financial
reports. Typically one calendar year represents
one accounting year (usually referred to as a
fiscal year) for a company. Be aware that while
many corporations align their fiscal years with
calendar years, others do not.
Principle 1: Historical Cost Financial statements
report companies’ resources at an initial
historical or acquisition cost. Let’s assume a
company purchased a piece of land for $1
million 10 years ago. Under GAAP, it will
continue to record this original purchase price
(typically called book value) even though the
market value (referred to as fair value) of this
land has risen to $10 million
Principle 2: Revenue Recognition. Accrual
basis of accounting dictates that revenues must
be recorded when earned and measurable.
The revenue recognition principle is a
cornerstone of accrual accounting together with
matching. They both determine the accounting
period, in which revenues and expenses are
recognized. According to the principle,
revenues are recognized when they are realized
or realizable, and are earned (usually when
goods are transferred or services rendered), no
matter when cash is received. In cash
accounting – in contrast – revenues are
recognized when cash is received no matter
when goods or services are sold. Cash can be
received in an earlier or later period than
obligations are met (when goods or services are
delivered) and related revenues are recognized
that results in the following two types of
accounts: Accrued: Revenue is recognized
before cash is received. Deferred revenue:
Revenue is recognized after cash is received.
Principle 3: Matching Principle. Under the
matching principle, costs associated with
making a product must be recorded (“matched”
to) the revenue generated from that product
during the same period. The matching
principle is a culmination of accrual
accounting and the revenue
recognition principle. They both determine
the accounting period, in which revenues and
expenses are recognized. According to the
principle, expenses are recognized when
obligations are (1) incurred (usually when
goods are transferred or services rendered, e.g.
sold), and (2) offset against recognized
revenues, which were generated from those
expenses (related on the cause-and-effect basis),
no matter when cash is paid out. In cash
accounting—in contrast—expenses are
recognized when cash is paid out, no matter
when obligations are incurred through transfer
of goods or rendition of services: e.g., sale. In
simple words the matching principle: prescribes
expenses to be reported in the same period as
the revenues that were earned as a result of the
expenses
Principle 4: Full Disclosure Under the full
disclosure principle, companies must reveal all
relevant economic information that they
determine to make a difference to their users.
Such disclosure should be accomplished in the
following sections of companies’ reports:
Financial statements, Notes to financial
statements, Supplementary information
Constraint 1: Estimates and Judgments Certain
measurements cannot be performed completely
accurately, and must therefore utilize
conservative estimates and judgments. For
example, a company cannot fully predict the
amount of money it will not collect from its
customers, who having purchased goods from it
on credit, ultimately decide not to pay. Instead,
a company must make a conservative estimate
based on its past experience with bad
customers.
Constraint 2: Materiality Inclusion and
disclosure of financial transactions in financial
statements hinge on their size and effect on the
company performing them. Note that
materiality varies across different entities; a
material transaction (taking out a $1,000 loan)
for a local lemonade stand is likely immaterial
for General Electric, whose financial
information is reported in billions of dollars.
Constraint 3: Consistency For each company,
the preparation of financial statements must
utilize measurement techniques and
assumptions that are consistent from one period
to another.
Constraint 4: Conservatism Financial
statements should be prepared with a downward
measurement bias. Assets and revenues should
not be overstated, while liabilities and expenses
should not be understated.
Comprehensive income is defined by the Financial
Accounting Standards Board, or FASB, as “the change
in equity of a business enterprise during a period from
transactions and other events and circumstances from
non-owner sources. It includes all changes in equity
during a period except those resulting from investments
by owners and distributions to owners.” The change in a
company's net assets from nonowner sources over a
specified period of time. Comprehensive income is a
statement of all income and expenses recognized during
that period. The statement includes revenue, finance
costs, tax expenses, discontinued operations, profit share
and profit/loss.
A company's operating income after operating expenses
are deducted, but before income taxes and interest are
deducted. If this is a positive value, it is referred to as net
operating income, while a negative value is called a net
operating loss (NOL).
Opportunity cost: The opportunity cost of a choice is
the value of the best alternative forgone, in a situation in
which a choice needs to be made between several
mutually exclusive alternatives given limited resources.
Assuming the best choice is made, it is the "cost"
incurred by not enjoying the benefit that would be had
by taking the second best choice available.
Periodic Vs perpetual inventory: 1.Inventory Account
and Cost of Goods Sold Account are used in both
systems but they are updated continuously during the
period in perpetual inventory system whereas in periodic
inventory system they are updated only at the end of the
period.
2.Purchases Account and Purchase Returns and
Allowances Account are only used in periodic inventory
system and are updated continuously. In perpetual
inventory system purchases are directly debited to
inventory account and purchase returns are directly
credited to inventory account. 3. Sale Transaction is
recorded via two journal entries in perpetual system.
One of them records the sale value of inventory whereas
the other records cost of goods sold. In periodic
inventory system, only one entry is made. 4. Closing
Entries are only required in periodic inventory system to
update inventory and cost of goods sold. Perpetual
inventory system does not require closing entries for
inventory account.
Cash Vs Accrual-1.Definitions: The cash basis records
financial information only when cash changes hands
during transactions. The accrual method records
transactions as they occur, matching revenues earned
with money expensed for business operations. 2.
Revenues are reported on the income statement in the
period in which the cash is received from customers. 3.
Revenues are reported on the income statement when
they are earned---which often occurs before the cash is
received from the customers. 4. Expenses are reported on
the income statement in the period when they occur or
when they expire---which is often in a period different
from when the payment is made. 5.Time Frame: While
the accrual method requires that transactions be recorded
for monthly and yearly periods, the cash method allows
transactions to overlap calendar dates until cash is
received for goods or services. 4. Expenses are reported
on the income statement when the cash is paid out.
6.Warnings: Although the cash basis method is easy to
use, it does not generate accurate reports for forecasting
future sales and expenses. The accrual method
accurately records revenues, but it does not track how
much cash companies collect during their accounting
periods.
Off Balance sheet: An asset or debt that does not appear
on a company's balance sheet. Items that are considered
off balance sheet are generally ones in which the
company does not have legal claim or responsibility for.
For example, loans issued by a bank are typically kept
on the bank's books. If those loans are securitized and
sold off as investments, however, the securitized debt is
not kept on the bank's books. One of the most common
off-balance sheet items is an operating lease.
Indication "2/10, n/30" (or "2/10 net 30") on an invoice
represents a cash (sales) discount provided by the seller
to the buyer for prompt payment. The term 2/10, n/30 is
a typical credit term and means the following:-"2" shows
the discount percentage offered by the seller. "10"
indicates the number of days (from the invoice date)
within which the buyer should pay the invoice in order
to receive the discount. "n/30" states that if the buyer
does not pay the (full) invoice amount within the 10 days
to qualify for the discount, then the net amount is due
within 30 days after the sales invoice date.
Adjusted trial balance: once the unadjusted trial
balance accounts have been reviewed and the proper
adjusting entries prepared, the adjusting entries are
posted to the general ledger. To verify that debits equal
credits in the general ledger after the entries are posted,
another trial balance is prepared. This trial balance is
called an adjusted trial balance. The adjusted trial
balance is an internal document and is not a financial
statement. The purpose of the adjusted trial balance is to
be certain that the total amount of debit balances in the
general ledger equals the total amount of credit
balances.
Matching Principle. Under the matching principle, costs
associated with making a product must be recorded
(“matched” to) the revenue generated from that product
during the same period. The matching principle is a
culmination of accrual accounting and the revenue
recognition principle. They both determine
the accounting period, in which revenues and
expenses are recognized. According to the principle,
expenses are recognized when obligations are (1)
incurred (usually when goods are transferred or services
rendered, e.g. sold), and (2) offset against recognized
revenues, which were generated from those expenses
(related on the cause-and-effect basis), no matter when
cash is paid out. In cash accounting—in contrast—
expenses are recognized when cash is paid out, no matter
when obligations are incurred through transfer of goods
or rendition of services: e.g., sale. In simple words the
matching principle: prescribes expenses to be reported in
the same period as the revenues that were earned as a
result of the expenses.
A Deferred expense or prepayment, prepaid expense,
plural often prepaid, is an asset representing cash paid
out to a counterpart for goods or services to be received
in a later accounting period. For example if a service
contract is paid quarterly in advance, at the end of the
first month of the period two months remain as a
deferred expense. In the deferred expense the early
payment is accompanied by a related recognized
expense in the subsequent accounting period, and the
same amount is deducted from the prepayment.
Deferred revenue (or deferred income) is a liability,
such as cash received from a counterpart for goods or
services that are to be delivered in a later accounting
period. When such income item is earned, the
related revenue item is recognized, and the deferred
revenue is reduced. It shares characteristics with accrued
expense with the difference that a liability to be covered
later is an obligation to pay for goods or services
received from a counterpart, while cash for them is to be
paid out in a later period when its amount is deducted
from accrued expenses.
BEP: In economics & business,
specifically cost accounting, the break-even
point (BEP) is the point at which cost or
expenses and revenue are equal: there is no net
loss or gain, and one has "broken even." A
profit or a loss has not been made,
although opportunity costs have been "paid,"
and capital has received the risk-adjusted,
expected return. In short, all costs that needs to
be paid are paid by the firm but the profit is
equal to 0. The accounting method of
calculating break-even point does not include
cost of working capital. The financial method of
calculating break-even, called value added
break-even analysis, is used to assess the
feasibility of a project. This method not only
accounts for all costs, it also includes
the opportunity costs of the capital required to
develop a project. Formula of BEP=Fixed
cost/contribution per unit. BEP Tk= BEP unit X
sales price per unit. Contribution per
unit=Selling price – Variable price.
Contribution margin: An important term used
with break-even point or break-even analysis
is contribution margin. In equation format it is
defined as follows: Contribution per
unit=Selling price P U – Variable price P U.
Sensitivity Analysis: A technique used to
determine how different values of an
independent variable will impact a particular
dependent variable under a given set of
assumptions. This technique is used within
specific boundaries that will depend on one or
more input variables, such as the effect that
changes in interest rates will have on a bond's
price. Sensitivity analysis is very useful when
attempting to determine the impact the actual
outcome of a particular variable will have if it
differs from what was previously assumed. By
creating a given set of scenarios, the analyst can
determine how changes in one variable(s) will
impact the target variable. Another refinement
of the break-even analysis is the “sensitivity
analysis.” This refers to using the break-even
point to evaluate different scenarios. For
example, what happens if you increase prices by
25%? What happens if unit sales fall by 20%?
Using a spreadsheet, it is very simple to
perform such calculations quickly, allowing you
to look at different situations.
Accounting definition: Accountancy, or accounting, is
the production of financial records about an
organization. Accountancy generally produces financial
statements that show in money terms the economic
resources under the control of management; selecting
information that is relevant and representing it faithfully.
The principles of accountancy are applied to
accounting, bookkeeping, and auditing.
Step of Accounting: Transactions Financial transactions
start the process. Transactions can include the sale or
return of a product, the purchase of supplies for business
activities, or any other financial activity that involves the
exchange of the company’s assets, the establishment or
payoff of a debt, or the deposit from or payout of money
to the company’s owners. Journal entries The
transaction is listed in the appropriate journal,
maintaining the journal’s chronological order of
transactions. The journal is also known as the “book of
original entry” and is the first place a transaction is
listed.
Posting The transactions are posted to the account that it
impacts. These accounts are part of the General Ledger,
where you can find a summary of all the business’s
accounts.
Trial balance At the end of the accounting period
(which may be a month, quarter, or year depending on a
business’s practices), you calculate a trial balance.
Worksheet Unfortunately, many times your first
calculation of the trial balance shows that the books
aren’t in balance. If that’s the case, you look for errors
and make corrections called adjustments, which are
tracked on a worksheet. Adjusting journal entries You
post any corrections needed to the affected accounts
once your trial balance shows the accounts will be
balanced once the adjustments needed are made to the
accounts. You don’t need to make adjusting entries until
the trial balance process is completed and all needed
corrections and adjustments have been identified.
Financial statements You prepare the balance sheet and
income statement using the corrected account balances.
Closing the books You close the books for the revenue
and expense accounts and begin the entire cycle again
with zero balances in those accounts.
Basic step in recording process: 1. Analyze each
transaction for its effects on the accounts.
2. Enter the transaction information in a journal:
A journal details all the financial transactions of a
business and which accounts these transactions affect. 3.
Transfer the journal information to the appropriate
accounts in the ledger: The transactions are posted to
the account that it impacts. These accounts are part of
the General Ledger, where you can find a summary of
all the business’s accounts.

Functional and operational definition of accounting:

1. Reording of transaction,

2. classification and posting of transaction,

3. Summarizing of transaction,

4. Determination of financial result,

5. exhibition of the financial position,

6. communicate the financial information,

7. Analysis of financial position.

Operational: 1. Formulation of policy and preparation

plan, preparation of budget, cost control, evaluation of
worker performance, prevention of errors of frauds,
determining the source of fund.
Accounting Information is a set of financial data performance over time. Much of the work that goes into
indicating an organization's resources, revenues, debts or setting accounting standards is based around the need for
expenses. Information about accounting information comparability. Reliability :This implies that the
system is responsible for providing timely and accurate accounting information that is presented is truthful,
financial and statistical reports for internal management accurate, complete (nothing significant missed out) and
decision making, and for external parties such as capable of being verified (e.g. by a potential investor).
investors. Objectivity :This implies that accounting information is
prepared and reported in a "neutral" way. In other words,
User of accounting Information: Internal user: 1. Owner-
it is not biased towards a particular user group or vested
for analyzing the viability and profitability of their
interest
investment and determining any future course of action.
Management-for analyzing the organization's Financial instrument act 1993-Restriction on the
performance and position and taking appropriate payment of dividends.- No financial institution shall pay
measures to improve the company results.  any dividend on its shares, unless all its capitalized
Employees: for assessing company's profitability and its expenses including preliminary expenses, organization
consequence on their future remuneration and job expenses, commission for share selling and brokerage,
security. Internal Audit, labor union, shareholders losses and other items have been completely written off.
External User: Future Investor- for analyzing the
feasibility of investing in the company. Investors want to
make sure they can earn a reasonable return on their
investment before they commit any financial resources
to the company. External Audit, Tax Authourities: for
determining the credibility of the tax returns filed on
behalf of the company. - Creditors: for determining the
credit worthiness of the organization. Terms of credit are
set by creditors according to the assessment of their
customers' financial health. Creditors include suppliers
as well as lenders of finance such as banks. 
Customers: for assessing the financial position of its
suppliers which is necessary for them to maintain a
stable source of supply in the long term. Regulatory
Authorities: for ensuring that the company's disclosure
of accounting information is in accordance with the rules
and regulations set in order to protect the interests of the
stakeholders who rely on such information in forming
their decisions. Payee , central bank
Quantities Feature: Understandability :This implies the
expression, with clarity, of accounting information in
such a way that it will be understandable to users - who
are generally assumed to have a reasonable knowledge
of business and economic activities. Relevance: This
implies that, to be useful, accounting information must
assist a user to form, confirm or maybe revise a view -
usually in the context of making a decision (e.g. should I
invest, should I lend money to this business? Should I
work for this business?) Consistency :This implies
consistent treatment of similar items and application of
accounting policies. Comparability :This implies the
ability for users to be able to compare similar companies
in the same industry group and to make comparisons of
BRPD Circuler: September 23, 2012, BRPD Circular No. 14
General Provision: Banks will be required to maintain
General Provision in the
following way : (1) @ 0.25% against all unclassified
loans of Small and Medium Enterprise (SME) as defined
by the SME & Special Programmers Department of
Bangladesh Bank from time to time and @ 1% against
all unclassified loans (other than loans under Consumer
Financing, Loans to Brokerage House, Merchant Banks,
Stock dealers etc., Special Mention Account as well as
SME Financing.) (2) @ 5% on the unclassified amount
for Consumer Financing whereas it has to be maintained
@ 2% on the unclassified amount for (i) Housing
Finance and (ii) Loans for Professionals to set up
business under Consumer Financing Scheme. (3) @ 2%
on the unclassified amount for Loans to Brokerage
House, Merchant Banks, Stock dealers, etc. (4) @ 5% on
the outstanding amount of loans kept in the 'Special
Mention Account'. (5) @1% on the off-balance sheet
exposures. (Provision will be on the total exposure and
amount of cash margin or value of eligible collateral will
not be deducted while computing Off balance sheet
exposure.)
b) Specific Provision: Banks will maintain provision at
the following rates in respect of
classified Continuous, Demand and Fixed Term Loans:
(1) Sub-standard : 20% (2) Doubtful : 50%
(3) Bad/Loss : 100%
c) Provision for Short-term Agricultural and Micro-
Credits:
(1) All credits except 'Bad/Loss' (i.e. 'Doubtful', 'Sub-
standard', irregular and regular credit accounts) : 5% (2)
'Bad/Loss' : 100%
Bank Company act1991: profit and loss account:
Accounts and balance sheet.- (1) At the expiration of
each financial year every banking company incorporated
inside or outside Bangladesh shall, in respect of all
business transacted by it and through its branches within
that year, prepare a balance sheet and profit and loss
account as well as a financial report as on the last
working day of the year in the forms set out in the first
schedule or as near thereto as possible. (2) The balance
sheet, profit and loss account and financial report of any
banking company- a) shall be signed in the case of a
banking company incorporated in Bangladesh, by its
managing director or its principal officer and where
there are more than three directors of the banking
company, by at least three of those directors, and where
there are not more than three directors, by all of them;
b) shall be signed in the case of a banking company
incorporated outside Bangladesh, by the manager or
agent of the principal office of the company in
Bangladesh and by another officer next in seniority to
the manager or agent.
(3) Notwithstanding that the forms relating to the
submitting of a balance sheet, profit and loss account
and financial report of a banking company differ from
the form E of the Third Schedule of the Companies Act,
the provisions of that Act shall, in the case of submitting
such balance sheet, profit and loss account and financial
report, be applicable to the extent they are consistent
with the provisions of this Act
 Following is the contribution margin income statement of a single product company:
Total Per unit
Sales $1,200,000 $80
Less variable expenses $840,000 $56
———– ——-
Contribution margin 360,000 $24
Less fixed expenses 300,000 ——-
———–
Net operating income $60,000
———–
Required:
1. Calculate break-even point in units and dollars.
2. What is the contribution margin at break-even point?
3. Compute the number of units to be sold to earn a profit of $36,000.
4. Compute the margin of safety using original data.
5. Compute CM ratio. Compute the expected increase in monthly net operating if sales increase by
$160,000 and fixed expenses do not change.
Solution:
(1) Break-even point in units and dollars:
Fixed expenses / Unit contribution margin
$300,000 / $24
12500 units
or
(12,500 units × $80) = $1000000
(2) Contribution margin at break-even point:
Contribution margin must be $300,000 at break-even point because it will cover fixed costs and
nothing will remain to go towards profit.
(3) Computation of target profit (contribution margin method):
(Fixed expenses + Target profit) / Unit contribution margin
($300,000 + $36,000) /$24
Company must sold 14,000 units of product to earn a target profit of $36,000.
(4) Margin of safety in dollars and percentage:
Actual or budgeted sales – sales required to break-even
$1,200,000 – $1,000,000
$200,000
or
$200,000 / 1,200,000 = 16.67%
(5) CM ratio and expected change in net operating income:
Contribution margin / Total sales
360,000 / 1,200,000
30%
If the sales are increased by $160,000 without any change in fixed expenses, the net operating
income will be increased by:
$160,000 × CM ratio of 30%
$48,000