FPSC Senior Auditors Test Preparation Basic Accounting Terms and Questions for Test
Definition of accounting: “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of a financial character and interpreting the results there of”.
2. Book keeping: It is mainly concerned with recording of financial data relating to the business operations in a significant and orderly manner.
3. Concepts of accounting:
A. Separate entity concept
B. Going concern concept
C. Money measurement concept
D. Cost concept
E. Dual aspect concept
F. Accounting period concept
G. Periodic matching of costs and revenue concept
H. Realization concept.
4 Conventions of accounting:
B. Full disclosure
5. Systems of book keeping:
A. single entry system
B. double entry system
6. Systems of accounting:
A. Cash system accounting
B. Mercantile system of accounting.
7. Principles of accounting:
A. Personal a/c: Debit the receiver
Credit the giver
B. Real a/c: Debit what comes in
Credit what goes out
C. Nominal a/c: Debit all expenses and losses
Credit all gains and incomes
8. Meaning of journal: Journal means chronological record of transactions.
9. Meaning of ledger: Ledger is a set of accounts. It contains all accounts of the business enterprise whether real, nominal, personal.
10. Posting: It means transferring the debit and credit items from the journal to their respective accounts in the ledger.
11. Trial balance: Trial balance is a statement containing the various ledger balances on a particular date.
12. Credit note: The customer when returns the goods get credit for the value of the goods returned. A credit note is sent to him intimating that his a/c has been credited with the value of the goods returned.
13. Debit note: When the goods are returned to the supplier, a debit note is sent to him indicating that his a/c has been debited with the amount mentioned in the debit note.
14. Contra entry: Which accounting entry is recorded on both the debit and credit side of the cashbook is known as the contra entry.
15. Petty cash book: Petty cash is maintained by business to record petty cash expenses of the business, such as postage, cartage, stationery, etc.
16. Promissory note: an instrument in writing containing an unconditional undertaking signed by the maker, to pay certain sum of money only to or to the order of a certain person or to the barer of the instrument.
17. Cheque: A bill of exchange drawn on a specified banker and payable on demand.
18. Stale Cheque: A stale cheque means not valid of cheque that means more than six months the cheque is not valid.
20. Bank reconciliation statement: It is a statement reconciling the balance as shown by the bank passbook and the balance as shown by the Cash Book. Obj: to know the difference & pass necessary correcting, adjusting entries in the books.
21. Matching concept: Matching means requires proper matching of expense with the revenue.
22. Capital income: The term capital income means an income which does not grow out of or pertain to the running of the business proper.
23. Revenue income: The income, which arises out of and in the course of the regular business transactions of a concern.
24. Capital expenditure: It means an expenditure which has been incurred for the purpose of obtaining a long term advantage for the business.
25. Revenue expenditure: An expenditure that incurred in the course of regular business transactions of a concern.
26. Differed revenue expenditure: An expenditure, which is incurred during an accounting period but is applicable further periods also. Eg: heavy advertisement.
27. Bad debts: Bad debts denote the amount lost from debtors to whom the goods were sold on credit.
28. Depreciation: Depreciation denotes gradually and permanent decrease in the value of asset due to wear and tear, technology changes, laps of time and accident.
29. Fictitious assets: These are assets not represented by tangible possession or property. Examples of preliminary expenses, discount on issue of shares, debit balance in the profit And loss account when shown on the assets side in the balance sheet.
30. Intangible Assets: Intangible assets mean the assets which is not having the physical appearance. And it’s have the real value, it shown on the assets side of the balance sheet.
31. Accrued Income: Accrued income means income which has been earned by the business during the accounting year but which has not yet been due and, therefore, has not been received.
32. Outstanding Income: Outstanding Income means income which has become due during the accounting year but which has not so far been received by the firm.
33. Suspense account: The suspense account is an account to which the difference in the trial balance has been put temporarily.
34. Depletion: It implies removal of an available but not replaceable source, Such as extracting coal from a coal mine.
35. Amortization: The process of writing of intangible assets is term as amortization.
36. Dilapidation: The term dilapidation to damage done to a building or other property during tenancy.
37. Capital employed: The term capital employed means sum of total long term funds employed in the business. i.e.
(Share capital+ reserves & surplus +long term loans – (non business assets + fictitious assets)
38. Equity shares: Those shares which are not having pref. rights are called equity shares.
39. Pref.shares: Those shares which are carrying the pref.rights are called pref. shares Pref.rights in respect of fixed dividend. Pref.right to repayment of capital in the event of company winding up.
40. Leverage: It is a force applied at a particular work to get the desired result.
41. Operating leverage: the operating leverage takes place when a changes in revenue greater changes in EBIT.
42. Financial leverage: it is nothing but a process of using debt capital to increase the rate of return on equity
43. Combine leverage: It is used to measure of the total risk of the firm = operating risk + financial risk.
44. Joint venture: A joint venture is an association of two or more the persons who combined for the execution of a specific transaction and divide the profit or loss their of an agreed ratio.
45. Partnership: Partnership is the relation b/w the persons who have agreed to share the profits of business carried on by all or any of them acting for all.
46. Factoring: It is an arrangement under which a firm (called borrower) receives advances against its receivables, from financial institutions (called factor)
47. Capital reserve: The reserve which transferred from the capital gains is called capital reserve.
48. General reserve: the reserve which is transferred from normal profits of the firm is called general reserve
49. Free Cash: The cash not for any specific purpose free from any encumbrance like surplus cash.
50. Minority Interest: Minority interest refers to the equity of the minority shareholders in a subsidiary company.
51. Capital receipts: Capital receipts may be defined as “non-recurring receipts from the owner of the business or lender of the money crating a liability to either of them.
52. Revenue receipts: Revenue receipts may defined as “A recurring receipts against sale of goods in the normal course of business and which generally the result of the trading activities”.
53. Meaning of Company: A company is an association of many persons who contribute money or money’s worth to common stock and employs it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company.
54. Types of a company:
1. Statutory companies
2. Government company
3. Foreign company
4. Registered companies:
A. Companies limited by shares
B. Companies limited by guarantee
C. Unlimited companies
D. private company
E. public company
55. Private company: A private co. is which by its AOA: Restricts the right of the members to transfer of shares Limits the no. Of members 50. Prohibits any Invitation to the public to subscribe for its shares or debentures.
56. Public company: A company, the articles of association of which does not contain the requisite restrictions to make it a private limited company, is called a public company.
57. Characteristics of a company:
> Voluntary association
> Separate legal entity
> Free transfer of shares
> Limited liability
> Common seal
> Perpetual existence.
58. Formation of company:
> Commencement of business
59. Equity share capital: The total sum of equity shares is called equity share capital.
60. Authorized share capital: It is the maximum amount of the share capital, which a company can raise for the time being.
61. Issued capital: It is that part of the authorized capital, which has been allotted to the public for subscriptions.
62. Subscribed capital: it is the part of the issued capital, which has been allotted to the public
63. Called up capital: It has been portion of the subscribed capital which has been called up by the company.
64. Paid up capital: It is the portion of the called up capital against which payment has been received.
65. Debentures: Debenture is a certificate issued by a company under its seal acknowledging a debt due by it to its holder.
66. Cash profit: cash profit is the profit it is occurred from the cash sales.
67. Deemed public Ltd. Company: A private company is a subsidiary company to public company it satisfies the following terms/conditions Sec 3(1)3:
1. Having minimum share capital 5 lakhs
2. Accepting investments from the public
3. No restriction of the transferable of shares
4. No restriction of no. of members.
5. Accepting deposits from the investors
68. Secret reserves: Secret reserves are reserves the existence of which does not appear on the face of balance sheet. In such a situation, net assets position of the business is stronger than that disclosed by the balance sheet.
These reserves are created by:
1. Excessive depot an asset, excessive over-valuation of a liability.
2. Complete elimination of an asset, or under valuation of an asset.
69. Provision: provision usually means any amount written off or retained by way of providing depreciation, renewals or diminutions in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.
70. Reserve: The provision in excess of the amount considered necessary for the purpose it was originally made is also considered as reserve Provision is charge against profits while reserves is an appropriation of profits Creation of reserve increase proprietor’s fund while creation of provisions decreases his funds in the business.
71. Reserve fund: The term reserve fund means such reserve against which clearly investment etc.,
72. Undisclosed reserves: Sometimes a reserve is created but its identity is merged with some other a/c or group of accounts so that the existence of the reserve is not known such reserve is called an undisclosed reserve.
73. Finance management: Financial management deals with procurement of funds and their effective utilization in business.
74. Objectives of financial management: financial management having two objectives that Is:
1. Profit maximization: The finance manager has to make his decisions in a manner so that the profits of the concern are maximized.
2. Wealth maximization: Wealth maximization means the objective of a firm should be to maximize its value or wealth, or value of a firm is represented by the market price of its common stock.
75. Functions of financial manager:
> Investment decision
> Dividend decision
> Finance decision
> Cash management decisions
> Performance evaluation
> Market impact analysis
76. Time value of money: The time value of money means that worth of a rupee received today is different from the worth of a rupee to be received in future.
77. Capital structure: It refers to the mix of sources from where the long-term funds required in a business may be raised; in other words, it refers to the proportion of debt, preference capital and equity capital.
78. Optimum capital structure: Capital structure is optimum when the firm has a combination of equity and debt so that the wealth of the firm is maximum.
79. Wacc: It denotes weighted average cost of capital. It is defined as the overall cost of capital computed by reference to the proportion of each component of capital as weights.
80. Financial break-even point: It denotes the level at which a firm’s EBIT is just sufficient to cover interest and preference dividend.
81. Capital budgeting: Capital budgeting involves the process of decision making with regard to investment in fixed assets. Or decision making with regard to investment of money in long term projects.
82. Payback period: Payback period represents the time period required for complete recovery of the initial investment in the project.
83. ARR: Accounting or average rates of return means the average annual yield on the project.
84. NPV: The Net present value of an investment proposal is defined as the sum of the present values of all future cash inflows less the sum of the present values of all cash out flows associated with the proposal.
85. Profitability index: Where different investment proposal each involving different initial investments and cash inflows are to be compared.
86. IRR: Internal rate of return is the rate at which the sum total of discounted cash inflows equals the discounted cash out flow.
87. Treasury management: It means it is defined as the efficient management of liquidity and financial risk in business.
88. Concentration banking: It means identify locations or places where customers are placed and open a local bank a/c in each of these locations and open local collection canter.
89. Marketable securities: Surplus cash can be invested in short term instruments in order to earn interest.
90. Ageing schedule: In an ageing schedule the receivables are classified according to their age.
91. Maximum permissible bank finance (MPBF): It is the maximum amount that banks can lend a borrower towards his working capital requirements.
92. Commercial paper: A cp is a short term promissory note issued by a company, negotiable by endorsement and delivery, issued at a discount on face value as may be determined by the issuing company.
93. Bridge finance: It refers to the loans taken by the company normally from commercial banks for a short period pending disbursement of loans sanctioned by the financial institutions.
94. Venture capital: It refers to the financing of high-risk ventures promoted by new qualified entrepreneurs who require funds to give shape to their ideas.
95. Debt securitization: It is a mode of financing, where in securities are issued on the basis of a package of assets (called asset pool).
96. Lease financing: Leasing is a contract where one party (owner) purchases assets and permits its views by another party (lessee) over a specified period
97. Trade Credit: It represents credit granted by suppliers of goods, in the normal course of business.
98. Over draft: Under this facility a fixed limit is granted within which the borrower allowed to overdraw from his account.
99. Cash credit: It is an arrangement under which a customer is allowed an advance up to certain limit against credit granted by bank.
100. Clean overdraft: It refers to an advance by way of overdraft facility, but not back by any tangible security.