Basic Accounting for Viva

Definition of Accounting:
“Accounting is the process of identifying, measuring and communicating
economic information to permit informed judgment and decisions by the
users of information”. – AAA

অররর র অরঙ পররমাপরযাগ্ি ব্িবসারয়ের রবরভিন ললেনরদেনসমহর䶉罅র সংগ্র䶉罅, সংকলেন,

সুসংবদ্ধভিারব রলেরপবদ্ধকররণ, আররর ক প্ররতিরবদেন প্রস্তুতিকররণ, রবরশ্লেষরণ ও রবশদে
ব্িাখ্িাকররণরক র䶉罅সাবরবজান বরলে ।

We have said that accounting consists of these functions:

• Recording
• Classifying
• Summarizing
• Reporting and evaluating the financial activities of a business

Origin and Evaluation

Primitive / Development Period (Before 1494),
Second / Pre-analytical Period (1494-1800),
Third / Analytical Period (1800-1950),
Current / Modern Period (Post 1950).

Accounting Information:
Accounting information is that information of an organization that helps
users to make better financial decision.

Accounting Information System:

Accounting Information System is generally a computer based method for
tracking accounting activity in conjunction with information technology
resources.
An electronic system containing all documents that a company uses to
prepare financial statements and that one may use to defend against audit.
The accounting information system pulls data from the centralized database,
process and transforms it and ultimately generates a summary of that data as
information that can now be easily consumed and analyzed by business
analyst, managers or other decision makers.
Management Information System (MIS):
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Management Information System is the study of people, technology,
organizations and the relationships among them.
AIS is a part of MIS. AIS just focuses on finance and accounting while MIS
is more broad. AIS produce informal reports to the management, but MIS
produce formal reports.
Users of accounting information:
A. Internal Users:
(i) Proprietor,
(ii) Management authority,
(iii) Internal auditor,
(iv) Accounts departments,
(v) Employees,
(vi) Company officers.
B. External Users:
(i) Government,
(ii) Share holders,
(iii) Lenders,
(iv) Creditors,
(v) Investors,
(vi) Customers,
(vii) Researchers,
(viii) Chamber of commerce,
(ix) General public,
(x) External auditor,
(xi) Stock Exchanges,
(xii) Tax authority.

Double Entry System:

The double entry system is a system of accounting which records two folds
aspects of a business transaction.
Every debit must have a corresponding credit and vice-versa.
The double entry system of accounting means that every business transaction
will involve two accounts; one debit and another credit.
Controller of accounting Profession in Bangladesh;
The Institute of Chartered Accountants of Bangladesh.
Event:

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Event means a process or part of a process having a particular moment and a
place of occurrence.
Transaction:
A transaction is a business event that has a monetary impact on an entity’s
financial statements, and is recorded as an entry in its accounting records.
Financial statements of business organizations

A financial statement (or financial report) is a formal record of the financial

activities of a business, person, or other entity.
All of the companies produce financial statements as the final end product of
their accounting process. These financial statements provide relevant
financial information both to those inside the company—management—and
to those outside the company—creditors, stockholders, and other interested
parties. The next section introduces four common financial statements—the
income statement, the statement of retained earnings, the balance sheet, and
the statement of cash flow.
The financial statement that reflects a company’s profitability is the income
statement.
The statement of retained earnings shows the change in retained earnings
between the beginning and end of a period (e.g. a month or a year).
The balance sheet reflects a company’s solvency and financial position.
The statement of cash flows shows the cash inflows and outflows for a
company over a period of time.
The cash flow statement represents an analysis of all of the transactions of
the business, reporting where the firm obtained its cash and what it did with
it.

Basic Financial Statements:

(i) Comprehensive Income Statement,
(ii) Statement of Retained earnings/ Owners equity Statement,
(iii) Statement of financial Position,
(iv) Cash Flow statement.

Elements of Financial Statement;

(i) Assets, (ii) Liabilities, (iii) Equity, (iv) Investments by the Owners,
(v) Distribution to the owners, (vi) Revenues, (vii) Expenses, (viii)
Gains, (ix) losses, (x) Comprehensive income.

Components of Financial Statement:

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 (i) Assets, (ii) Liabilities, (iii) Equity, (iv) Revenues, (v) Expenses,
(vi) Gains, (vii) losses.

Account:
Simply account means title of homogenous transactions.
Account is a formal record of a particular type of transaction expressed in
terms of money and kept in a ledger.
Classification of Account:
A. Traditional Method:
(i) Personal Account,
(ii) Asset / Real Account,
(iii) Nominal Account.
B. Modern/ Equation Method:
(i) Asset Account,
(ii) Liability Account,
(iii) Owner’s Equity Account,
(iv) Revenue Account,
(v) Expenses Account,
(vi) Drawings Account.
Accounting Standard:
An accounting standard is a guideline for financial accounting, such as how
a firm prepares and presents its business income and expense, assets and
liabilities. The generally Accepted Accounting Principles is comprised of a
large group of individual accounting standards.
International Accounting Standard:
Standards for the preparation and presentation of financial statements created
by the International Accounting Standard Committee (IASC). They were
first written in 1973, and stopped when the International Accounting
Standard Board (IASB) took over their creation in 2001.
Bangladesh Financial Reporting Standards (BFRS):
The financial reporting standard prescribed by the Institute of Chartered
accountants of Bangladesh (ICAB) are known as Bangladesh Financial
Reporting Standards (BFRS including BAS). BFRS and BAS are closely
modelled on International Accounting Standards and International Financial
Reporting Standards issued by the International Accounting Standard
Boards.

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Accounting Principle:
A principle that governs the current account practice and that is used as a
reference to determine the appropriate treatment of complex transactions.
Accounting Theory:
Accounting theory is a set of basic concepts and assumptions and related
principles that explain and guide the accountants action in identifying,
measuring and communicating economic information.
Accounting Assumptions or concepts:
Basic assumptions and conditions of accounting upon which the science of
accounting is based.
(i) Business Entity Concept: Business Entity Concept assumes each
business has a separate existence from its owner’s, creditors,
employees, customers, other intended parties and other businesses.
(ii) Going Concern/ Continuity Concept: It assumes that an entity
will continue to operate indefinitely unless strong evidence exists
that the entity will terminate.
(iii) Money Measurement concept: It assumes each business uses a
monetary unit of measurement, such as TK. Instead of physical or
other unit of measurement.
(iv) Periodicity/ Time period Concept: It assumes an entity’s life can
be subdivided into months or years to report its economic activity.
(v) Consistency Concept: It assumes a company uses the same
accounting principles and reporting practice every accounting
period.

Accounting Principles:
(i) Matching Principle: The accounting rule that all expenses
incurred in earning a revenue be deducted from the revenue in
determining net income whether the expenses paid in cash or not.
(ii) Revenue Recognition Principle: Revenue should be earned and
realized before they are recognized (recorded).
(iii) Expense Recognized: Expenses should be recognized (recorded)
as they are incurred to generate revenues.
(iv) Gain and Loss recognition: Gain may be recorded when realized,
but losses should be recorded when they become first evident.

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 (v) Full Disclosure: Information important enough to influence the
decisions of an informed user of the financial statements should be
disclosed.
Accounting Conventions:
Convention refers to a statement or rule of practice which is employed in the
solution to a given class of problem or guides the behavior in a certain kind
of Situation.
(i) Cost-benefit: Optional information should be included in financial
statements only if the benefits of providing it exceed its costs.
(ii) Materiality: Only items that would affect a knowledgeable user’s
decision are material (important) and must be reported in a
theoretically correct way.
(iii) Conservatism: Transactions should be recorded so that net assets
and net income are not over stated.

Accounting Cycle:
Accounting cycle is a step-by-step process of recording, classification and
summarization of economic transactions of a business. It generates useful
financial information in the form of financial statement including income
statement, balance sheet, cash flow statement and statement of changes in
equity.
Accounting cycle is a series of steps performed during the accounting period
to analyze record, classify, summarize and report useful financial
information for the purpose of preparing financial statements.
Steps of Accounting Cycle;
(i) Collecting and analyzing data from transactions and events,
(ii) Putting transaction into the general journal,
(iii) Posting entries to the general ledger,
(iv) Preparing an unadjusted trial balance,
(v) Giving adjusting entries appropriately,
(vi) Preparing an adjusted trial balance,
(vii) Organizing the accounts into the financial statements,
(viii) Closing the books,
(ix) Preparing a post closing trial balance to check the accounts, and
then
(x) Reporting to the related parties.

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Golden Rules of Accounting
Personal Account; Receiver- Debit, and Sender- Credit.
Real account : What comes in – debit , and what goes out – credit.
Nominal Account : All expenses and losses – debit, and all income and gains
– credit.
AICPA – American Institute of Certified Public Accountants (1939).
FASB- Financial Accounting Standard Board.
GASB – Governmental Accounting Standard Board.
SFAC – Statements of Financial Accounting Concepts.
IASB – International Accounting Standard Board.
APB- Accounting Principle Board.
IFRS- International Financial Reporting Standard issued by FASB. Till now
9 IFRS are disclosed:
I- First time adoption of IFRS,
II- Share based payment,
III- Business combinations,
IV- Insurance contracts,
V- Non-current assets held for sale and discontinued operations,
VI- Exploration for the evaluation of mineral resources,
VII- Financial instruments, disclosures,
VIII- Operating segments, and
IX- Financial instruments.
ASB- Accounting Standard Board.
SSAP – Statement of Standard Accounting Practice.
AAA – American Accounting Association.
ICMA – Institute of Certified Management Accountants.
CMAs – Certified Management Accountants.
CIA – Certified Internal Audit.
IIA – Institute of Internal Audit.
TQM – Total Quality Management.

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ABC – Activity Based Costing.
SEC – Securities and Exchange Commission.
BSEC – Bangladesh Securities and Exchange Commission.
FEI – Financial Executives Institute.
IMA – Institute of Management Accountants.
CFO – Chief Financial Officer.
CPA (Certified Public Accountant):
An accountant may become a certified public accounted by passing an
examination prepared and graded by the American Institute of Public
Accountants (AICPA). As of May 1994, the CPA examination became a two
day exam given each May and November. The section includes business law
and professional responsibilities, auditing, accounting and reporting.
AICPA (American Institute of Certified Public Accountants):
AICPA is a professional organization of CPAs. In a 20 years period ending
in 1959, the AICPA committee on accounting procedure issued 51
accounting research bulletins recommending certain principles and practices.
From 1959 through 1973, the committee’s successor, the Accounting
Principle Board (APB), issued 31 numbered opinions that CPAs are
generally required to follow.

FASB (Financial Accounting Standard Board):

In 1973, an independent, seven member full time FASB replaced the APB.
The FASB has issued numerous statements of Financial Accounting
standards. The FASB is the private sector organization now responsible for
the development of new financial accounting standard.
GASB (Governmental Accounting Standard Board):
In 1984, the GASB was established with a full time chairperson and four
part-time members. The GASB issued statements on Accounting and
Financial Reporting in the governmental area. The mission of the
Governmental Accounting standards Board is to establish and improve
standards of state and local governmental accounting and financial reporting
that will result in useful information for the users of financial report and

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guide and educate the public, including issuers, auditors, and users of those
financial reports.
SEC (Securities and Exchange Commission):
SEC created under the Securities and Exchange Act of 1934. Securities and
Exchange Commission is a governmental agency that administers important
acts dealing with the interstate sale of securities. The SEC has the authority
to prescribe accounting and reporting practice for companies under its
jurisdiction.
ICMAB (Institute of Cost and Management Accountants in
Bangladesh):
The Institute of Cost and Management Accountants of Bangladesh (ICMAB)
is the national body of the professional Cost and Management Accountants
of Bangladesh. It is established with the prime objectives of promoting and
regulating the Cost and Management Accounting profession in the country.
The institute offers education and training to the students interested to pursue
career in this field and provides highly recognized CMA degree on
fulfillment of requisite qualification. The institute undertakes research in
relevant fields and is the sole authority to issue practicing license to its
members.
ICAB (Institute of Chartered Accountants of Bangladesh):
The Institute of Chartered Accountants of Bangladesh is the national
professional accountancy body in Bangladesh. It is the sole organization in
Bangladesh with the right to award the Chartered Accountant designation. It
has around 1400 members.
It was established under the Bangladesh Chartered Accountants Order 1973
(Presidential Order No. 2 of 1973). The Ministry of Commerce, Government
of the People’s Republic of Bangladesh is the administrative Ministry of the
ICAB.
The mission of the ICAB is to provide leadership in the development,
enhancement and coordination of the accountancy profession in Bangladesh
in order to enable the profession to provide services of consistently high
quality in the public interest.
ICAB has regional Offices in Dhaka, the capital of Bangladesh and
Chittagong. There also Chapter Management committee Offices both in
London, UK and Ontario, Canada.
GAAP (Generally Accepted Accounting Principles):

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Generally Accepted Accounting Principles (GAAP) are the standard
framework of guidelines for financial accounting used in any given
jurisdiction; generally known as accounting standards or standard accounting
practice. These include the standards, conventions, and rules that accountants
follow in recording and summarizing and in the preparation of financial
statements.
Generally Accepted Accounting Principles are accounting rules used to
prepare, present, and report financial statements for a wide variety of
entities, including public limited and private limited companies, non-profit
organizations, and governments.
Name of some CA firms in Bangladesh;
i. ACNABIN
ii. Hoda Vasi Chowdhury & Co
iii. Syful Shamsul Alam & Co
iv. A. Qasem & Co
v. Rahman Rahman Huq
vi. Howladar Yunus & Co
vii. M J Abedin & Co
viii. S F Ahmed & Co
ix. Ahmed Zaker & Co
x. AHMAD & AKHTAR
xi. A Wahab & Co
xii. S H Khan & Co
xiii. K M Alam & Co
xiv. Ata Khan & Co
xv. G Kibria & Co
Name of some CA firms in UK:
i. PwC, London (2nd)
ii. Ernst & Young, London (3rd)
iii. Grant Thornton Uk, London (5th)
iv. BDO, London ( 6th)
v. RSM Tenon, London (7th)
vi. Smith and Williamson, London (8th).
vii. Moore Stephens, London (10th)
viii. Mazars, London (11th)
ix.
Name of some CA firms in USA:
i. Deloitte, New York. (1st)
ii. Baker Tilly, Chicago (9th)
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Others:
i. KPMG, Amsterdam,Netherlands (4th)
ii. Johnston Carmichael, Aberdeen, Scotland (20th)
Name of Some Accounting Software Used in Bangladesh:
i. The Tally Software
ii. The Troyee Software
iii. The QuickBook Software
iv. Tally.ERP 9
Name of Some Accounting Software Used in Banking Sector:
i. Flora Ltd. (Bangladesh)
ii. BaxiBank (Bangladesh)
iii. Loan Performer
iv. Moneyman
v. ARMNet Integrated Banking
vi. ABS
vii. Bank Mill
viii. Bank Fusion
ix. Bank Trade etc.
Journal:
Journal is a book containing chronological record of each day’s transactions.
Simple Journal Entries:
When one debit and one credit involved in journal entries then they are
called simple journal entries.
Compound Journal Entries:
When more than one debit and / or credit involved in journal entries, then
they are called compound journal entries.
Ledger:
The permanent store house of all the transactions. It is the complete
collection of all the accounts of an entity.
Cross indexing:

Cross indexing is placing of the account number of the ledger account in the
general journal and the general journal page number in the ledger account.
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Accounting Period:
Any meaningful time period that may be length of one month or three
months or six months or one year and such on but the periods one year in
length are standard.
Adjusting Entry:
Adjusting entries are journal entries made at the end of an accounting period
to allocate income and expenditure to the period in which they are actually
occurred.
Closing Entry:
Closing entries are journal entries made at the end of an accounting period
which transfer the balances of temporary accounts to permanent accounts.
Closing entries are based on the account balances in an adjusted trial
balance.
Reversing Entry:
Reversing entries are journal entries made on the first day of an accounting
period in order to remove certain adjusting entries made in the previous
accounting period.
Trial Balance:
The proof of the mathematical equality of debit and credit balances of all
accounts is called a trial balance.
Correcting Entry:
If any error is occurred in recording transactions and to rectify the error of
that transactions which entries are given is called correcting entries.
Discount:
Discount is the incentive for early payment. Discount is two types-
(i) Trade Discount: Trade discount is the percentage deduction from
the list price of goods at the time of selling.
(ii) Cash Discount: Cash discount is usually allowed for making the
payment early.
Cash Book:
Journal in which all cash receipts and payments (including bank deposits and
withdrawals) are recorded first, in chronological order, for posting to the

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ledger. Cash book is regularly reconciled with the bank statements as an
internal auditing measure.
Window Dressing:
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 the deceptive practice of using accounting tricks to
make a company’s balance sheet and income statement appear better than
they really are.
Objectives:
i. To obtain funding (to borrow money),
ii. To increase profits and liquidity ratios,
iii. Showing the firm as profitable and sustainable,
iv. Improving the liquidity position of the firm,
v. Showing less liability, mainly to impress and attract investors,
financial lenders and employees- mostly managers.
Petty Cash:
A petty cash system or imprest cash system is a system that is installed to
allow a company to make small expenditure that might impractical or
impossible by check.
Cash:
Cash includes deposit in banks available for current operations at the balance
sheet date plus cash on hand.
Cash Equivalents:
An asset that is so easily and quickly convertible to cash that holding is
essentially equivalent to holding cash.
A cash equivalent is a highly liquid investment having a maturity of three
months or less. It should be at minimal risk of a change in value. Examples
of cash equivalents are:
 Commercial paper,
 Short-term government bonds,
 Treasury bills, etc.

Accounts Receivable:
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Accounts receivables are the amounts owed to a business by customers.
IOU:
This article is about the acknowledgement of debt.
An IOU (I Owe You) is usually an informal document of acknowledging
debt. An IOU differs from a promissory note in that an IOU is not a
negotiable instrument and does not specify repayment terms such as the time
of repayment. IOUs usually specify the debtor, the amount owed and
sometimes the creditor.
Lease:
A “lease’ is defined as a contract between a lessor and a lessee for the hire of
a specific asset for a specific period on payment of specific rentals.
A lease is a contract between two parties to rent a property. The property
owner is the grantor of the lease and is the leaser. The person or company
obtaining rights to posses and use the property is the lease.
Lessor:
The party who is the owner of the asset permitting the use of the same by the
other party on payment of a periodical amount.
Lessee:
The party who acquires the right to use asset for which he pays periodically.
Types of lease:
Two types;
i. Operating lease: Operating lease is basically a rental agreement.
The lessee records rent expense for each of the lease payments.
ii. Capital Lease: A capital lease is a rental agreement in form, but
the substance of the transaction is an asset purchase. With capital
lease, the lessee records an asset and related liability rather than
rental expense. The lessee also record depreciation on the asset. If a
lease agreement meets any of the following criteria, it is considered
to be a capital lease:
a. The lease term is equal to 75% or more of the life of the
asset.
b. The present value of the minimum lease payments is equal to
at least 90% of the cost of the asset.
c. The lease transforms ownership of the asset to the lessee at
the end.
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 d. The lease contains a bargain purchase option.
Goodwill:
Goodwill in accounting is an intangible asset that arises when a buyer
acquires an existing business, but pays more than the fair market value of the
net assets (total assets – total liabilities). The goodwill amounts to the excess
of the “purchase consideration” (the money paid to purchase the asset or
business) over the total value of the assets and liabilities.
Patent:
A patent is a right granted by the federal government. It gives the owner of
an invention the authority to manufacture a product or to use a process for a
specified time.
Copyright:
A copyright is a legal right created by the law of a country that grants the
creator of original work exclusive rights to its use and distribution, usually
for a limited time.
Franchise:
A franchise is a contract between two parties granting the franchisee (the
purchaser of franchise) a certain rights and privileges ranging from name
identification to complete monopoly of service.
Trade Mark:
A trade mark is a symbol, design or logo used in conjunction with a
particular product or company.
Trade Name:
A trade name is a brand name under which a product is sold or a company
does business.
Chain Discounts:
Sometimes the list price of a product is subject to several trade discounts,
this series of discounts is a chain discount.
Cost of Goods Sold:
Cost of goods sold is the cost to the seller of the goods sold to customers.
Merchandise Inventory:

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Merchandise inventory is the quantity of goods available for at any given
time.
Plant Assets:
To be classified as a plant asset, an asset must be tangible, have useful
service life more than one year, and be used in business operation rather held
for resale.
Fair Market Value:
Fair market value is the price received for an item sold in the normal course
of business.
Appraised value:
An appraised value is an expert’s opinion of an item’s fair market price if the
items were sold.
Book Value:
The book value of an asset is its recorded cost less accumulated depreciation.
Unclassified Balance Sheet:
An unclassified balance sheet has three major categories; assets, liabilities,
and stockholder’s equity.
Classified Balance Sheet:
A Classified balance sheet contains the three major categories; assets,
liabilities and stockholder’s equity and subdivides them to provide useful
information for interpretation and analysis by users of financial statements.
Centralized Accounting:
 All accounting functions completed from head office or one unit.
 One dedicated team.
 One system.
 One set of procedure.
 Direct access to management team.
Benefits:
 Dedicated central resource for finance.
 Consistency of system and procedures.
 Improved control and visibility.
 Ease of access to documentation.
 Less risk of document loss.

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  Efficiency of staff and ability to fully utilize.
Decentralized Accounting:
 Staff at individual units.
 Paperwork handled at site level.
 Independent reporting accountability.
Benefits:
 Increased engagement by local managers.
 Increased skill levels of staff at site levels.
 Inevitability of local procurement.
 Local managers see information they think they need to see.
 All documents seen and matched locally.
Bank:
Bank is a financial intermediary accepting deposits and granting loans.
Bank Accounk:
Account maintained by a bank in which a depositor’s money is kept.
Cheque:
A cheque is a formal order on a bank by depositors to pay a certain sum of
money to a particular person or bearer.
Bank Reconciliation Statement:
Bank reconciliation statement is an analytical statement of the differences
between the cash book balance and the balance of the bank statement of an
organization.
Errors in Accounting:
(i) Clerical Error,
(ii) Errors of Omission,
(iii) Errors of Commission,
(iv) Compensating Errors,
(v) Errors of miss-posting,
(vi) Errors of Principle.

Worksheet:

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A worksheet is a working paper used by the accountant in an ordinary
manner to bring together the information used in preparing the financial
statements and the adjusting and closing entries.
Depreciation:
Depreciation is the process of allocating the acquisition cost of an asset
among the useful life of that asset.
Accumulated Depreciation:
Accumulated depreciation is a contra asset account to depreciable assets
such as building, machinery and equipment.
Depletion:
Depletion is the exhaustion that results from the physical removal of a part
of natural resources.
Amortization:
The systematic write off to expense the cost of an intangible asset over its
useful life.
Methods of depreciation:
(i) Straight line method,
(ii) Double declining balance method,
(iii) Sum of years digit method,
(iv) Machine hours method,
(v) Production output method,
(vi) Annuity method,
(vii) Sinking fund method,
(viii) Revaluation method.
Single Entry:
Single entry is not any particular system of book keeping, but it is an
admixture of single entry, double entry and no entry.
Stockholder:
An individual, group, or organization that holds one or more shares of a
company and in whose name the share certificate is issued.

Stakeholders:

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An individual, group, organization, member or system that affects or can be
affected by an organization actions.
A person, group or organization that has interest in organization. Example-
creditors, government, owner, employees, suppliers etc.
Profitability:
Profitability is the ability to generate income.
Solvency:
Solvency is the ability to pay debts as they become due.
Assets:
Assets are the resources owned by a business which provide benefit to its
future operations and are convertible to cash.
Tangible Assets:
Tangible assets are those that maintain a physical existence or form. They
can be seen and touched and occupy space. Equipment, land and
automobiles are examples of tangible assets.
Intangible Assets;
Intangible assets have no physical existence but exist in contracts or rights.
Patents, copyrights and goodwill are examples of intangible assets.

Liabilities:

Liabilities are obligations of the company to transfer something of value to

another party. On a company’s balance sheet, a liability may be a legal debt
or an accrual, which is an estimate of an obligation.

A liability is a present obligation of the enterprise arising from the past

events, the settlement of which is expected to result in an outflow from the
enterprise' resources, i.e., assets.

Equity:

Equity is the residual interest in the assets of the enterprise after deducting
all the liabilities under the Historical Cost Accounting model. Equity is also
known as owner's equity. Under the units of constant purchasing power
model equity is the constant real value of shareholders´ equity.
Income:

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Income is an increase in the net assets of the entity during an accounting
period except for such increases caused by the contributions from owners.
Revenues:
Revenues increase in economic benefit during an accounting period in the
form of inflows or enhancements of assets, or decrease of liabilities that
result in increases in equity. However, it does not include the contributions
made by the equity participants, i.e., proprietor, partners and shareholders.

Revenues are the inflows of assets (such as cash) resulting from the sale of
products or rendering services to customers.
Expenses:
Expenses are the costs incurred to generate revenue.
Expenses decrease in economic benefits during an accounting period in the
form of outflows, or depletions of assets or increases of liabilities that result
in decreases in equity
Gains:
Increase in equity from transactions or events except those that result from
revenues or investment by owners.
Losses:
Decrease in equity from transactions or events except those that result from
expenses or distributions to owners.
Inflation:
Inflation is the continuous and persistent rise in the level of price. Sudden
rise in the price level is not inflation, such as though the price of
commodities rises in the month of Ramadan, it is not inflation. Inflation up
to 3-5% is beneficial for the growth of the economy, because low inflation
rate encourages producers, as their profit rises, they increase output,
unemployment falls but inflation in two digits is not good for the economy.
Types of Business Organizations

In general, business entity or organizations are:

 Sole proprietorship
 Partnerships
 Corporations

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Sole Proprietorship
A sole proprietorship is a business wholly owned by a single individual.

Partnerships

A partnership is a legal association of two or more individuals called

partners and who are co-owners of a business for profit.

Company:

A corporation is a business incorporated under the laws of a state and

owned by a few stockholders or thousands of stockholders
A company is a voluntary association or organization of many persons who
contribute money or money’s worth to common stock and employs it in
some trade or business and who shares the profit or loss arising thereform.

Articles of Association:

An article of Association is a document which contains rules, regulations and

laws regarding the internal management of an organization.

Memorandum of Association:

Memorandum of association is an official document setting out the details of

a company’s existence.

Financial accounting vs Management accounting

Financial accounting is concerned with the preparation of accounting

information for the needs of users who are external to the business.
Management accounting is concerned with the preparation of accounting
information for the needs of users who are internal to the business.

Cash Basis Accounting

Most of us use the cash method to keep track of our personal financial
activities. The cash method recognizes revenue when payment is received,
and recognizes expenses when cash is paid out.

Accrual Basis Accounting

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The accrual method of accounting requires that revenue be recognized and
assigned to the accounting period in which it is earned. Similarly, expenses
must be recognized and assigned to the accounting period in which they are
incurred.

Annual Report

An annual report is a comprehensive report on a company’s activities

throughout the preceding year. Annual reports are intended to give
shareholders and other interested people information about the company's
activities and financial performance.

Definition of Corporate Financial Reporting

According to the Companies Act 1994: Corporate financial reporting is a

series of activities that allows companies to record operating data and report
accurate accounting statements at the end of each accounting year or where
necessary

Conceptual Framework

A coherent system of interrelated objectives and fundamentals that is

expected to lead to consistent standards and that prescribes the nature,
function and limits of financial accounting and reporting.

What do you mean by Ratio?

A proportionate relationship between two variables.
A relationship between various accounting figures, which are connected with
each other, expressed in mathematical terms, is called accounting ratios.
Ratio analysis is one of the techniques of financial analysis to evaluate the
financial condition and performance of a business concern.

Variance:
In accounting a variance is the difference between an expected or planned
amount and an actual amount.
In Cost Accounting, variance analysis is associated with analyzing the
difference between the standard costs and actual costs for a given level of
output or activity.

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Break-Even point:
The firm’s break-even point is defined as the level of sales at which all
operating costs are covered or alternatively the EBIT is zero.
Break-even point refers to a point of no profit, no loss. It is the level of sales
where firm’s revenues are equal to its total costs.
Off Balance Sheet Items:
An asset or debt that does not appear on a company’s balance sheet. Ex-
Operating lease, contingent asset or liability.
Banks off Balance sheet items:
 Letters of credit,
 Inland bill purchase (IBP),
 Foreign bill purchases (FBPs),
 Loans against trust receipts (LTRs),
 Bills for collection,
 Payments against documents (PADs),
 Loans against Imported Merchandise (LIM), etc.
FOB Shipping Point
FOB shipping point indicates that the buyer must pay to get the goods
delivered (The buyer will record freight –in and the seller will not have any
delivery expense). With terms of FOB shipping point the title to the goods
usually passes to the buyer at the shipping point. This means that goods in
transit should be reported as a purchase and as inventory by the buyer. The
seller should report a sale and an increase in accounts receivable.

FOB destination:

FOB destination indicates that seller will incur the delivery expense to get
goods to the destination. With terms of FOB destination the title to the goods
usually passes from the buyer to the seller at the destination. This means that
goods in transit should be reported as inventory by the seller, since
technically the sale does not occur until the goods reach to the destination.

Perpetual Vs Period Inventory System:

The periodic system relies upon an occasional physical count of the

inventory to determine the ending inventory balance and the cost of goods
sold, while the perpetual system keeps continual track record of inventory

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balances. The more sophisticated of the two is the perpetual system, but it
requires much more record keeping to maintain.

Under the perpetual system, there are continual updates to either the general
ledger or inventory journal as inventory-related transactions occur.
Conversely, under a periodic inventory system, there is no cost of goods sold
account entry at all in an accounting period until such time as there is a
physical count, which is then used to derive the cost of goods sold.

Balance Sheet:

A balance sheet is a financial statement that summarizes a company’s assets,

liabilities, and shareholder’s equity.

A summary of the financial balances of a company or organization is called

a balance sheet.

Contingent Liability:

A contingent liability is one where the outcome of an existing situation is

uncertain, and this uncertainty will be resolved by the court decision.

A contingent liability is either a possible obligation arising from past events

and depending on future events not under an entity’s control, or a present
obligation not recognized because either the entity cannot measure the
obligation or settlement is not probable.

Contingent Asset:

A contingent asset is a possible asset that may arise because of a gain that is
contingent on future events that are not under an entity’s control. According
to the accounting standards, a business does not recognize a contingent asset
even if the associated contingent gain is probable. A contingent asset
becomes a realized (and therefore recordable) asset when the realization of
income associated with it is virtually certain. The treatment of a contingent
asset is not consistent with the treatment of a contingent liability, which
should be recorded when it is probable.

Contra Asset Account:

A contra asset account is a negative asset account that offsets the balance in
the asset account with which it is paired. The purpose of a contra asset

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account is to store a reserve that reduces the balance in the paired account.
By stating this information separately in a contra asset account, a user of
financial information can see the extent to which a paired asset should be
reduced.

Contra Entry:

In double entry accounting system, a contra entry is an entry which is

recorded to reverse or offset an entry on the other side of an account. If a
debit entry is recorded in an account, contra entry will be recorded on the
credit side and vice-versa.

Debit and credit aspects of a single transaction are entered in the same
account, but in different columns. Each entry in this case is viewed as a
contra entry of the other.

IPO (Initial Public Offering):

IPO stands for initial public Offering. This is the first offering of share to the
general public from a company to list on stock exchange.

Currency Policy:

The central bank reserves a certain amount of gold equivalent to the value of
the money. This is called currency policy.

Tally Accounting:

Financial software developed for the accounting of small business. It is

mostly common and user friendly software.

Executive Accounting:

Executive accounting is designed for service type businesses that require a

sophisticated accounting system, yet simple to use accounting system.
Executive Accounting contains many advanced features such as three styles
of invoicing (service, distribution and recurrent), multi-currency capabilities,
multiple bank account capabilities and other powerful features.

Share:

A share is a part of ownership of a company.

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Stock:

Fully paid up shares are called stock.

A certificate documenting the shareholder’s ownership in the corporation.

Stock Split:

An increase in the number of outstanding shares of a corporation without

changing the shareholder’s equity.

Authorized Capital:

Authorized capital is the amount of capital with which a company is

registered with the registrar of joint stock companies. It is the maximum
amount of capital which a company can raise through shares i.e. share capital
can be maximum up to authorized capital and obviously not beyond.

Paid up capital:

The amount of capital against which the company has received the payments
from the shareholders.

Main Assets and liabilities of Bank:

Assets: Cash in hand, securities, loans and advances, property and

equipment, cash with central bank, cash with other bank, bills and securities
discounted.

Liabilities: Deposit from customers, borrowings, bank capital, reserve fund,

etc.

MBO (Management by Objectives):

MBO is a personnel management technique where managers and employees

work together to set, record and monitor goals for a specific period of time.

Auditing:

Auditing is concerned with the verification of accounting data, with

determining the accuracy and reliability of accounting statements and report.

Teeming and lading: is a method by which misappropriation of cash

already committed is concealed for some time.

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Internal audit: is the independent appraisal of activity within an
organization for the review of accounting, financial and other business
practice as a protective and constructive arm of management.

Vouch: Vouch means using personal experience to confirm the value or

merit of someone or something, to attest that someone or something is as
good as claimed.

Vouching: Vouching consists in comparing entries in the books of accounts

with documentary evidence in support thereof.

Voucher: is documentary evidence in support of a transaction in the book of

accounts.

Difference between an Invoice and a Voucher:

An invoice is the bill that is received by the Purchaser of goods or services

from an outside supplier. The vendor invoice lists the quantities of items,
brief descriptions, prices, total amount due, credit terms, where to remit
payment, etc.

A voucher is an internal document used in a company’s accounts payable

department in order to collect and organize the necessary documentation and
approvals before paying a vendor invoice. The voucher acts as a cover page
to which the following will be attached:

(i) Vendor invoice,

(ii) Company’s purchase order,
(iii) Company’s receiving report, and
(iv) Other information needed to process the vendor invoice for
payment.

Valuation: means to test the exact value of an asset on basis of its utility.

Capital reserve: is the part of capital gain, generally come from uncalled
share capital, share forfeiture etc.

Revenue reserve: is a reserve created out of profits.

Interim audit: is an audit which is conducted between the two annual

audits, with a view to find out interim profit so that the company can declare
an interim dividend.

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Memorandum of association: is an official document setting out the details
of a company’s existence.

Articles of association: is a document which contains rules, regulations and

byelaws regarding the internal management of the company.

Reserve capital: Company’s that portion of capital which doesn’t call

before winding up.

Capital: In commerce and as applied to individuals it is understood to mean

the sum of money which a merchant, banker or trader invests in any under
takings or which he contributes to the common stock of a partnership or joint
activity.

Capital reserve: That portion of net profit of the company is to be reserve

for formation capital fund etc.

Shares: Shares is small equal part of the capital of a company.

Bonus share: That share is issued free among the shareholder in exchange
of dividend that is called bonus share.

Right share: In order to collect excess capital to invite the present

shareholder for purchasing share before to distribute the new share in the
market i.e. called right share.

Share certificate: The share certificate is a certificate issued under the

common seal of the company seal of the company specifying the number of
share hold by any member.

Winding up of a company: Winding up of a company represents the

process whereby its life is ended and its property administrated for the
benefit of its creditors and member.

Amalgamation: Amalgamation refers to the formation of a new company to

purchase two or more existing companies necessitating the liquidation of the
latter’s companies.

Absorptions: When an existing company purchases the business of another

existing company then it is called absorption.

Reconstruction: Reconstruction denotes constitutional or organizational

change of a company.

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Goods: Means every kinds of moveable property other then actionable
claims and money and includes stock and shares growing crops and things
attached to or forming part of the land which are agreed to be several before
sale or under the contract of sale.

Profit: The profit of a business during a given period is the excess of income
over expenditure for that period.

Divisible profit: Divisible profits are those profits which can be legally
distributed to the share holder of the company in the form of dividend.

Dividend: Dividend means the part of the profit of a company which is

allocated among the shareholder of that company.

Interim dividend: The dividend which is given before end of the accounting
period is called interim dividend.

Revenue profit: The profit which is arises from the normal business
activities is called revenue profit.

Certificate: A certificate is a written confirmation of the accuracy of the

facts started there in and does not involve any estimate or opinion.

Marketing: Marketing is the performance of business activities that direct

the flow of goods and services from producer to consumer or user.

Marketing management: Marketing management is the process of

planning, organizing, implementing and controlling marketing activities to
facilitate exchanges effectively and efficiently.

Company: Company is a corporate enterprise that has a legal identity

separate from that of its members; it operates as one single unites in the
success of which all the members participate.

Departmental accounts: Under the same roof when the single businessman
operates several businesses in several room than that business is known as
departmental business and accounts of that business is known is known as
departmental accounts.

Actuary: The persons who are expert to measure the profit and loss of the
insurance company.

Surrender value: If the insurance company pays something to policy holder

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who immediately surrenders, that amount is known as surrender value.

Premium: Is a certain sum of money paid by the policy holder to insurer due
to bear the risk.

Contingent liabilities: Contingent liabilities are the liabilities which may or

may not happen. It is customary to show contingent liabilities as a foot note
to the balance sheet.

Insolvent: The person who is unable to pay dept is known as insolvent. Or

insolvent means any debtor who is declared as insolvent by the court.

Cost Accounting Cycle: Cost accounting cycle consists of recording a

classification of cost data, determination of cost and selling price, controlling
cost through budgeting and planning and taking cost decision.

Capital loss: Capital loss has been defined as any loss arising from the
transfer of capital assets.

Capital gain: The capital gain has been defined as any profits and gains
arising from the transfer of capital assets.

Soft loan:-The rate of interest is low of which loan and payment time
is more called soft loan.

Hard loan: Hard loan is a loan whose interest rate is high and
payment period is short.

Tied loan: If donor country adds condition with loan then it is called
tied loan.

United loan: United loan is unconditional loan.

Tax avoidance: If any assesses try to reduce total income and tax liability
through various plans under the law is called tax avoidance.

Tax evasion: If any assesses do not pay tax or pay tax less than actual by
fraud law, violating law or on the basis of lying is called tax evasion

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