- — Absorption Costing
- — Accelerated Depreciation
- — Accounting Analysis
- — Accounting Estimate
- — Accounting Policies
- — Accounting Principles
- — Accounting Standards
- — Accounts Payables
- — Accounts Receivable
- — Accrual Accounting
- — Acquisition Cost
- — Activity Based Costing (ABC)
- — Adjusting Entry
- — Administrative Expenses
- — Affiliate
- — Amortization Schedule
- — Annual Report
- — Annual vs. Interim Statement
- — Asset Based Financing
- — Authorized Capital
- — Authorized Shares
- — Bad Debt Reserve
- — Badwill
- — Balance Sheet
- — Bill of Exchange
- — Biological Assets
- — Bonus Depreciation
- — Book Value
- — Borrowing Costs
- — Borrowing Costs Eligible for Capitalization
- — Burden Rate
- — Business Combination
- — Capital Expenditure (CAPEX)
- — Capitalized Cost
- — Capped Rate (Capitalization Rate)
- — Cash Accounting
- — Cash Advance
- — Cash and Cash Equivalents
- — Cash Flows from Financing Activities
- — Cash Flows from Investing Activities
- — Cash Flows from Operating Activities
- — Clean Surplus Accounting
- — Clearing Account
- — Commodity
- — Common Shares
- — Common-size Financial Statement
- — Common-size Income Statement
- — Completed Contract Method of Accounting
- — Comprehensive Income
- — Conglomerate
- — Consolidated Financial Statement
- — Construction Contracts
- — Contingent Asset (Contingent Liability)
- — Continuing Operations
- — Convertible Security
- — Cost Method
- — Cost of Sales
- — Cost Recovery Method
- — Current Assets
- — Current Liabilities
- — Debit and Credit
- — Debt Management
- — Declining-Balance Depreciation Method
- — Deferred Tax Assets (Deferred Tax Liabilities)
- — Defined Benefit Plan
- — Defined Contribution Plan
- — Defined Contribution Plans
- — Depreciation (Amortization)
- — Diluted Earnings per Share
- — Direct Allocation Method
- — Direct Costing
- — Direct Labor Cost
- — Discontinued Operations
- — Disposable Income
- — Disposal Value
- — Distribution Cost
- — Double Entry Accounting
- — Double-Declining-Balance Depreciation Method (DDB)
- — Earnings per Share (EPS)
- — Effective Interest Method
- — Employee Benefits
- — Equity
- — Equity Instrument
- — Exchange Difference
- — External Reporting
- — Extraordinary Gain (Extraordinary Loss)
- — Fair Value
- — FIFO
- — Finance Costs
- — Financial Accounting
- — Financial Accounting Standards Board (FASB)
- — Financial Instruments
- — Financial Lease
- — Financial Report
- — Financial Statement
- — Financial Statement Transparency
- — Finished Goods Inventory
- — Fixed Asset
- — Fixed Assets
- — Fixed Capital
- — Foreign Currency Translation
- — Forensic Accounting
- — Forward Contract
- — Forward Rate
- — Fraudulent in Financial Reporting
- — Free Cash Flows
- — Functional and Presentation Currency
- — Generally Accepted Accounting Principles (GAAP)
- — Going Concern
- — Goodwill
- — Government Accounting Standards Board (GASB)
- — Gross Profit (Gross Margin)
- — Historical Cost
- — IFRS Main Financial Statement Forms
- — Impairment of Assets
- — Income Statement (Profit and Loss Statement)
- — Incremental Cost
- — Independence Standards Board (ISB)
- — Intangible Asset
- — Intellectual Property
- — Intercompany Eliminations
- — Interim Financial Statement
- — International Accounting Standards Board (IASB)
- — International Financial Reporting Standards (IFRS)
- — Inventories
- — Inventories: International Accounting Standard (IAS) 2 Overview
- — Inventory Accounting
- — Inventory Financing
- — Investment Property
- — Issued Capital (Share Capital)
- — Just-in-time Inventory Systems
- — Lease
- — LIBOR
- — LIFO
- — Liquidation Value
- — Long-term Liabilities
- — Mark to Market
- — Market Value
- — Merchandise Inventory
- — Minimum Lease Payments
- — Minority Interest
- — Net Assets
- — Net Book Value
- — Net Realizable Value
- — Net Sales
- — Net Worth
- — Nominal Value
- — Non-controlling Interest (NCI)
- — Non-Current Assets
- — Non-Current Liabilities
- — Normal Costing
- — Off Balance Sheet (OBS)
- — Operating Expenses
- — Operating Income
- — Operating Lease
- — Operating Segments
- — Overhead Costs
- — Pacioli
- — Par Value
- — Percentage-Of-Completion Method of Accounting
- — Perpetual Inventory
- — Perpetual Inventory System
- — Post-Closing Trial Balance
- — Post-employment Benefits
- — Post-Retirement Benefit
- — Pro Forma Invoice
- — Process Costing
- — Production Cost
- — Profit Center
- — Profit Distribution
- — Property, Plant and Equipment (PPE)
- — Provisions
- — Public Company Accounting Oversight Board (PCAOB)
- — Public Oversight Board (POB)
- — Purchase Method of Accounting
- — Push-Down Accounting
- — Qualifying Asset
- — Raw Materials
- — Realized Profit (Realized Loss)
- — Reconciliation
- — Redemption Value
- — Residual Value
- — Retail Method
- — Retained Earnings
- — Revenue
- — Salvage Value
- — Securities and Exchange Commission (SEC)
- — Share Premium
- — Shareholders Equity
- — Statement of Cash Flows
- — Statement of Changes in Equity
- — Statement of Comprehensive Income
- — Statement of Financial Position
- — Stockholder
- — Straight-Line Method of Depreciation
- — Subsidiaries, Joint ventures and Associates
- — Temporal Method
- — Transaction Costs
- — Treasury Shares
- — True Interest Cost (TIC)
- — Units of Production Method of Depreciation
- — Unrealized Gains & Losses
- — Unsecured Debt
- — US GAAP
- — US GAAP vs. IFRS
- — Work in Progress (WIP)
Accounting: What is it?
Meaning and definition of ‘Accounting’
Accounting refers to a process that provides a record about funds received or paid by an individual or a business. Accounting outlines and submits this info in reports and statements. The accounting reports are projected for the firm itself as well as for external parties. As explained by Investopedia, accounting is helpful for the management in making accurate decisions.
Role of Accounting
Rather than being an end in itself, accounting is a means to an end. It executes the service activity by proffering quantitative financial info which is helpful to the users in forming better business decisions. Moreover, accounting also delineates and analyses the mass of data of a company by measurement, classification, and summarization, thus condensing the data into statements and reports which reflect the financial condition and results of a company’s operations. Also, accounting as an information system gathers processes in addition to communicating info about a company to a large range of interested parties.
Objectives of Accounting
The main objectives of accounting include:
- To maintain systematic records
Accounting procedures are carried out to maintain a systematic record about the financial transactions. In the dearth of accounting, there would have been remarkable burden on memory of humans which, in most cases, would have been impossible to tolerate.
- To protect business properties
Accounting gives security to business properties from unjustified and unwarranted risks. This is achievable with the help of accounting providing info to the manager or the proprietor.
- To determine the operational profit or loss
Accounting is helpful in determining the net profit earned or the loss incurred on account of conducting the business. This can be achieved by maintaining a proper record about the incomes and expenses of a specific period.
- To ascertain the financial position of business
The P&L account provides the amount of gain or loss reached by the company during a specific period of time. This is also helpful in indicating the financial position of the company through the balance sheet or position statement.
- To facilitate rational decision making
Accounting is helpful in making rational decisions as it has taken upon itself the task of collection, analysis, and reporting info at the requisite points of time to the required authority levels.
Absorption costing, also known as full absorption costing, can be defined as a managerial accounting cost method of expensing all costs related to manufacturing of a specific product. The absorption costing method involves the use of total direct costs and overhead costs related to the manufacturing of a product as the cost base.
Accelerated depreciation refers to a method of depreciation used for income tax or accounting purposes which allows higher deductions in the initial years of an asset’s life.
Accounting analysis, also referred as financial analysis or financial statement analysis, can be explained as an assessment of the stability, viability, and profitability of a business, sub-business, or project. A financial analysis is carried out by professionals who prepare reports through the use of info obtained from financial statements and other reports. Besides, one key area of financial analysis is the extrapolation of company’s past performance into an estimate of its future performance.
Accounting estimate is an approximation of the amount to be debited or credited on items for which no precise means of measurement are available. They are based on specialized knowledge and judgment derived from experience and training. They are used in the financial statements to determine the carrying amounts of assets and liabilities and the associated income or expense for the period where such amounts cannot be measured with precision and certainty.
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
Accounting principles are the guidelines set by an accounting body that every entity must follow when they are preparing their financial statements. These accounting principles are mandatory to follow for the companies that are listed on the stock exchange and for other private companies also.
GAAP, short for Generally Accepted Accounting Principles, is the common set of accounting principles, procedures, and standards used by companies to compile their financial statements. GAAP are, therefore, a combination of authoritative standards and the generally accepted ways of recording and reporting accounting info.
Creditors rise when goods are purchased from the sellers on the basis of credit that is the cash isn’t pay at the time of transaction. These sellers or suppliers are called Creditors. They buy the goods but the cash or money is yet to be paid to them in the nearby future rather than at the moment of transaction. When accounts of such suppliers are made they are recognized as “Accounts payables”.
When credit sales are made that is the cash isn’t waged at the time of sale of the business or the buyer, here the augmentation of debtors takes room. These buyers are called Debtors. The goods are sold to them but the cash or money is to be received from them in the nearby future rather than at the stage of the transaction. When accounts of such customers are made, they are recognized as “Accounts receivables”.
Accrual accounting refers to the method of accounting which evaluates the performance and position of a company by recognizing economic activities irrespective of the occurrence of cash transactions. The main idea is that the economic activities are recognized by relating the revenues to the expenses at the time when transaction has occurred instead of when payment is received or made. Also, this method allows current cash flows (in and out) to combine with prospective cash flows thus providing a more accurate picture of the financial condition of a company.
Acquisition cost concept applies to the obtainment of the fixed assets, so that an association might use for its commercial and business activities. Acquisition cost concept helps determine the actual expenses of an asset; it does not only include its purchase price but many other costs as well. Alternatively referred to as book value this cost is stated under the fixed assets section of the balance sheet. An assets acquisition cost might comprise many other costs other than the purchase price of an asset, any cost incurred to get an asset such as plant and machinery into a working state are considered a part of the asset’s acquisition cost.
Activity Based Costing (ABC)
Activity based costing approach determines the cost of a product based on the activities performed during its production. ABC provides the opportunity for organisations that use cost based pricing to gain a greater understanding of their costs and to correct anomalies resulting from the distorted view given by conventional volume related costing.
In accountancy, adjusting entries can be explained as journal entries which are made generally at the closing of an accounting period to apportion income and expenditure to the period in which they occurred actually. Putting it other way, adjusting entries are generally recorded after transactions which have occurred during a specific month, were journalized and posted from but have not yet been accounted for. This is done at the closing stages of each period when such data and all facts are fully on hand.
Administrative expenses refer to the costs of operating a business that are not directly attributable to the production of goods or services. Administrative expenses are related to the organization as a whole as opposed to the individual departments.
The term "affiliate" refers to a type of inter-company relationship that involves one of the companies to own less than a majority of the stock held by the other company. Putting it other way, it can also be explained as a type of inter-company relationship wherein at least two individual companies are subsidiaries of a larger company.
In accounting, amortization is similar to a depreciation method in which the amount decreases over the period. The accounting of this decreasing amount is amortization. If the company has taken out an amortization loan, it will need to make periodic payment for this loan.
An annual report can be delineated as an annual publication which must be provided to shareholders by public corporations to explain their operations and financial conditions. The obverse part of the report includes an exciting combination of graphics, photos, as well as an accompany narrative, each of which records the activities of the company in the previous year. The flipside part of the report includes detailed financial and operational info.
Annual vs. Interim Statement
The annual financial statements generally cover a time period longer than what is required to allow timely reporting to creditors and investors of a company. Interim financial statements, on the other hand, covering a period of less than one year (like a month or a quarter), have been developed to give a timelier source of information. However, interim financial statements are generally unaudited and in that case, they should be clearly labeled as ‘unaudited’ thus avoiding misleading the statement users.
Asset Based Financing
Asset based financing is a specialized technique of providing structured working capital and term loans which are tenable by accounts receivable, machinery, inventory, equipment, and real estate.
Every company is authorized to issue and allocate some specific amount of capital shares to the share holders in that company. In other words this term is also referred to as the authorized share.
Authorized shares are basically the maximum shares of stock, which an entity can issue. The company specifies this particular number in its charter. However, this can be altered with approval from shareholder. Usually, the number of shares that are authorized is much more than what is actually required in order to provide a company the opportunity to issue stocks further when required.
Bad Debt Reserve
Usually the bad debt reserve is considered as an option when the debtor who is liable to pay a specific amount of debt to the creditor but he or she is considered bankrupt. In some other cases the debt is considered as the bad debt reserve when the cost of pursuing of any further action regarding the retrieving of debt from the debtor. Then the debt is also considered as the bad debt reserve.
There are many other ways to define this term. In fact the term badwill is the antonym of goodwill. It is also called as the negative goodwill. This situation usually arises when the individual pays the price for the company which is written in the balance sheet. It is also called as the book value of the company. Therefore the term badwill is often similarized with opposite of goodwill
Balance sheet is a snapshot of a company's financial condition at a specific moment in time, usually at the close of an accounting period. The balance sheet is the core of the financial statements (the other major financial statements are the income statement (statement of comprehensive income), statement of changes in equity and statement of cash flows). Unlike the other financial statements, balance sheet is accurate only at one moment in time, not a period of time.
Bill of Exchange
A bill of exchange refers to a written interest that does not bear any interest. A bill of exchange is generally used in international trade and aims at binding one party to pay a fixed amount of money to another party at a predestined future date.
International Accounting Standard 41 (IAS 41) defines biological asset as “a living animal or plant”.
Bonus depreciation refers to an additional amount of deductible depreciation which is awarded in addition to what is usually available. Bonus depreciation is always taken right away, in the first year that the depreciable item is put to use. This incentive type is proffered either as an extra incentive or as a measure of relief for small sized businesses which are seeking to purchase any additional equipment.
The book value can be defined as the value at which an asset is passed on a balance sheet.
Borrowing cost can be defined as interest and other costs incurred by an enterprise in relation to the borrowing of funds. Explaining in a more technical way, borrowing costs refer to the expense of taking out loan expenses like interest payments incurred from a loan or any other kind of borrowing. Interest also counts amortization of premium/discount on debt.
Borrowing Costs Eligible for Capitalization
Borrowing costs essentially refers to the interest related costs. But borrowing costs eligible for capitalization as per IAS 23 are not merely interest related costs that are levied on borrowings done for short period, like bank OD’s (Overdrafts) and notes that are payable. It is also not the costs that are levied on borrowings for long-term like real estate mortgage and term loan.
Burden rate is the indirect costs that are associated with either employees or the inventory of the company. In actuality, the burden rate is the rate with which indirect costs are allocated to the direct costs to make these indirect costs a part of the direct cost incurred. This rate is usually applied to the labor in the calculation of their payrolls or in calculation of inventory costs.
Generally, business combinations refer to transactions in which one company gains control, or at least controlling interest, in another company. A business combination can be aptly defined as amalgamation of the assets of two or more business entities for their consolidation as a single entity under single ownership. A business combination can be managed easily through the way of a voluntary acquisition, a merger, or a hostile takeover. In many cases, a preferred means of managing a business combination might be acquiring a controlling amount of stock.
Capital Expenditure (CAPEX)
The general definition of capital expenditure can be given as the funds utilized by a company for acquiring or upgrading the physical assets like property, equipment, or industrial buildings.
Capitalized cost can be defined as an expense that is added to the cost basis of a fixed asset on the balance sheet of a company. The capitalized costs are incurred while financing or building fixed assets. However, these costs are not expensed in the periods of being incurred, but identified over a time period through the way of amortization or depreciation.
Capped Rate (Capitalization Rate)
Capped rate is also called as the capitalization rate. It is calculated and defined as the ratio and percentage division of the profit or income which is obtained by the asset to the income to the income obtained from the capital cost of the specific product.
Cash accounting can be explained as an accounting method which involves recording the receipts during the period of being received, and the expenses are recorded in the period of being actually paid for.
Cash advance is the option provided to credit card holders to borrow money against their balances on the credit card. Most credit card users these days have found this option a very useful one as it helps them with many cash transactions. By definition, cash advance is a loan taken on a credit card, for which there is no charge of interest so all the borrower would be charged is with financing charge from the day the cash is borrowed up to the day when the amount is repaid in full.
Cash and Cash Equivalents
According to International Accounting Standard 7 (IAS 7), Cash “comprises cash on hand and demand deposits”. And cash equivalents “are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value”.
Cash Flows from Financing Activities
IAS 7 defines financing activities as the “activities that result in changes in the size and composition of the contributed equity and borrowings of the entity”.
Cash Flows from Investing Activities
IAS 7 defines investing activities as the activities that “are the acquisition and disposal of long-term assets and other investments not included in cash equivalents”.
Cash Flows from Operating Activities
IAS 7 defines operating activities as “the principal revenue-producing activities of the entity and other activities that are not investing or financing activities”.
Clean Surplus Accounting
Clean surplus accounting means the changes in the shareholder equity which is not the consequence of transaction with shareholders such as share repurchase, dividends, etc are shown in the income statement. The clean surplus accounting method offers elements of a forecasting model which gives price as a function of change in book value, earnings and expected returns.
Clearing account is a general ledger account, but it is not used for the posting purposes. This is an account, which is used to make a summary of similar transactions. This account is opened in the general ledger on temporary basis, and its purpose is that of a reminder. For example, an operating expense clearing account will be maintained to keep track of all the entries of operating expenses and to close the real operating expense account.
Commodity is a general term for plenty of products used by the consumer. By Definition, a commodity is a physical substance, like grains or metals which is interchangeable with another product of the same type and which is bought and sold by investors through sales and purchases. The price of the commodity is set according to the demand and supply of that commodity.
Common shares can be aptly defined as securities in lieu of equity ownership in a corporation. These common shares provide voting rights and entitle the share holder to a share of the success of the company through capital appreciation and dividends.
Common-size Financial Statement
Common size financial statements are different from the customary financial statements. Where the traditional financial statements are used for the reporting purposes and to report the monetary position of the company, the common size financial statements are used for the decision-making purposes. If an investor wants to compare the financial statements of two companies, there have to be some sort of scale to overcome the limitations of the comparisons and match the two unrelated business for investment purposes. Since the sizes of companies are not same, this usually leads to misleading and wrongful comparisons that affect the investments of the investors.
Common-size Income Statement
Common-size income statement is the type of income statements in which each item is reported as a reference to the revenue of the company. This method is executed by converting all the items of the income statements as a reference to percentage of the revenue. This is a method used for the analysis purpose.
Completed Contract Method of Accounting
Completed contract method of accounting is a method based on revenue recognition. This method is applicable for the lasting contracts, i.e., contracts spanning over more than one accounting period. In this method, the total contract revenue and the related costs incurred in the performance are recognizable in the period in which the contract is actually completed.
According to IAS 1 "Presentation of financial statements", comprehensive income is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners.
In simple terms, conglomerate is a combination of two or more corporations in a single corporate structure. This forms a group of companies that usually involves a single parent company and different subsidiaries. However, in a conglomerate, diversification of the business in the companies is normal practice, and usually these companies depict a multi-industry corporate structure. These corporate structures are often multinational.
Consolidated Financial Statement
Consolidated financial statements refer to the financial statements which lead to the subsidiaries of the holding company its summative accounting figure. Putting another way, consolidated financial statements can be addressed as the combined financial statements of a parent company and its subsidiaries.
A construction contract can be explained as the warranty that ensures that the executed job gets the specific amount of compensation or the way compensation will be distributed. Moreover, a construction contract is negotiated specifically for the construction of an asset or a group of interrelated assets.
Contingent Asset (Contingent Liability)
Contingent asset is possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.
Continuing operations refers to a business term which is used to define the divisions of the business of a company which is considered to be normal in addition to being expected to operate in for the near future.
A convertible security can be explained as an investment that can be changed into another form. The most common convertible security includes convertible preferred stock or convertible bonds, which can be transformed into common stock or equity. Moreover, a convertible security pays a sporadic fixed amount of money as a preferred dividend (in the case of convertible preferred shares) or a coupon payment (in the case of a convertible bond), and indicates the price at which it is convertible into common stock.
Cost method is a method of accounting for an investment, whereby the investment is recognized at cost.
Cost of Sales
Cost of sales refers to the direct costs attributable to the production of the goods or supply of services by an entity. It is also commonly known as the “cost of goods sold (COGS)”.
Cost Recovery Method
The cost recovery method is basically a method for recognizing revenue as per which the gross profit is not recognized till the time the entire merchandise cost has been successfully recovered. Thus, initially the payments that the customers make are treated in the form of cost recovery of the goods that are sold. Thereafter, the remaining amount collected is considered to be gross profit.
Current assets are those assets that are expected to be used (sold or consumed) within 12 months.
Current liabilities are those to be settled within the entity's normal operating cycle or due within 12 months, or those held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months. Other liabilities are non-current liabilities.
Debit and Credit
The terms, debit and credit are the fundamentals of accounting that date back to almost 500 years ago. This system of segregating the transactions into debit and credit categories is a very old one, and it is still in effect, as one of the accounting fundamentals. This system of debit and credit is not only used for financial reporting purposes only. These terms are equally important in finance, taxation and management accounting.
Debt management refers to an unofficial agreement with unsecured creditors for repayment of debts over a specific time period, generally extending the amount of time over which the debt will be paid back.
Declining-Balance Depreciation Method
Declining-balance depreciation method is one of the most popular depreciation methods apart from the straight-line method. It is also known as reducing balance method. In this method, the depreciation charged to the asset in the early years of asset life is higher, and it gradually decreases as the years pass. This method continues to decrease the value of the asset over its useful life until at the end of assets’ life, all there is left is a residual value. This residual value is the scrap value at which assets can be sold in the market after its useful life is finished.
Deferred Tax Assets (Deferred Tax Liabilities)
Deferred tax liabilities are “the amounts of income taxes payable in future periods in respect of taxable temporary differences”. International Accounting Standard 12 defines deferred tax assets as “the amounts of income taxes recoverable in future periods in respect of...
Defined Benefit Plan
Defined benefit plan is basically a retirement related plan that is sponsored by the employer and where an employee’s benefits are determined on the basis of a formula utilizing factors like employment duration and history of salary. Managing portfolio and risking investment is completely under the entity’s control. Besides, restrictions with regard to how and when an employee can withdraw the funds without being penalized also exist for the plan.
Defined Contribution Plan
Defined contribution plan is basically a plan for retirement where a certain specified percentage or amount of money is kept aside every year by an organization for their employees benefit. There are several restrictions with regard to how and when an employee can withdraw this amount so that he isn’t charged with any penalties.
Defined Contribution Plans
International Accounting Standard 19 (IAS 19) defines defined contribution plans as “post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods”.
IAS 16 defines depreciation as “the systematic allocation of the depreciable amount of an asset over its useful life”.
Diluted Earnings per Share
Diluted earnings per share (diluted EPS) is essentially the earnings made on every share of a public company that is calculated assuming that all the securities that are convertible were duly exercised. Instead of taking only the existing common stock into consideration, Diluted Earnings Per Share assumes that all the securities including convertible bonds, convertible preferred shares, stock options, warrants as well as other things, which can be altered into common stock is altered actually.
Direct Allocation Method
Direct allocation method is a method for cost allocation. In this method, the costs of the manufacturing services department are allocated directly to the production department of the company and to the product itself.
Direct cost is the amount accredited for production of some goods or provision of services. In other words in a production process of a product, cost of labor, material and other expenses related to this production calls direct cost. Direct cost is related directly to the volume of production. It must be noted that the material cost is included in direct cost but cost of machinery is not a part of it. In this context, direct cost can be defined as the process of determining direct cost included in an operation or production.
Direct Labor Cost
Direct labor cost is essentially the work related expenses that can be attributed to the actual manufacturing of a product/good. In case of service industry, direct labor cost is referred to the labor cost needed for providing a particular service. Thus, direct labor cost does not involve employees who are not involved in the production, like office and administrative staff members. It only consists of personnel who are responsible for setting up as well as maintaining the equipment.
The discontinued operations refer to the operations of a business which have been abandoned, sold, or else wise disposed of. As per accounting regulations, the continuing operations are required to be reported individually in the income statement other than discontinued operations.
Disposable income is the gross or total income of a firm or individual from where direct taxes (including income tax, PAYE etc) have been successfully deducted. After deducting important expenses including clothing, food, shelter etc., the balance amount is called discretionary income, which the person who has earned it is free to save or spend. Besides, the disposable income amount is utilized for calculating a person’s debt to income ratio.
Disposal value in accounting terms is the value of an asset or belonging, at which this asset should be sold or disposed off without incurring any loss to the company. For example, a machine has been installed in a factory and after a useful working on its life period needs to be replaced with a new model. The minimum value at which this machine should be sold without loss is called its book or disposal value.
Distribution costs (also known as “Distribution Expenses”) are usually defined as the costs incurred to deliver the product from the production unit to the end user.
Double Entry Accounting
Double-entry accounting is a system, which is used to record transactions in the daybooks for the accounting purpose. With the help of this system, the transactions are posted in the accounts, and financial statements are prepared. This system is one of the oldest and is said to be around for about 500 years. This is one of the most effective systems for recording transactions and is widely used by almost all the business in the world.
Double-Declining-Balance Depreciation Method (DDB)
It is a depreciation method in which the depreciation rate is applied double to that in straight line method. The depreciation in this method is charged on the complete purchase price of asset rather than the net of salvage value price in straight line method. In other words we can say that double declining depreciation method uses double the rate of straight line method.
Earnings per Share (EPS)
Earnings per share (EPS) is the portion of the company’s distributable profit which is allocated to each outstanding equity share (common share). Earnings per share is a very good indicator of the profitability of any organization, and it is one of the most widely used measures of profitability.
Effective Interest Method
Effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest revenue or interest expense over the relevant period.
Employee benefits can be explained as different non-wage compensations offered to employees other than their normal salaries or wages. Some good examples of these benefits are disability income protection, group insurance (health, life, dental etc.), housing, retirement benefits, tuition, daycare, sick leave, reimbursement, vacation, profit sharing, social security, education funding, and similar specialized benefits.
Equity is the portion of a company's assets that the shareholders own, as opposed to what they have borrowed. Equity is equal to total assets minus liabilities.
An equity instrument refers to a document which serves as a legally applicable evidence of the ownership right in a firm, like a share certificate. Equity instruments are, generally, issued to company shareholders and are used to fund the business. It is, however, not necessary that the issued equity must return a dividend for it is based on profits and the terms of business.
International Accounting Standard 21 (IAS 21) defines exchange difference as “the difference resulting from translating a given number of units of one currency into another currency at different exchange rates”.
External reporting requires an entity to provide well documented reports that can be circulated amongst the public and stockholders. Such a report does not include confidential information about the organization unless it is important to achieve a specific purpose. External reporting is also about furnishing shareholders and public with finance related information on a periodic basis in order to assist decision and control related process.
Extraordinary Gain (Extraordinary Loss)
In the income statement of the company, some events arise as extraordinary and non-recurring that are necessary to report. The reason for this is that the gain or losses are realized on these items and it is necessary to disclose them properly in the financial statements.
The international standards on accounting define the fair value as “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction”.
FIFO, an acronym for First In, First Out, is a concept in ways of organizing and manipulation of data proportionate to time and prioritization.
International Accounting Standard 23 defines finance costs as “interest and other costs that an entity incurs in connection with the borrowing of funds”.
Financial accounting refers to reporting of the financial position and performance of a firm by the way of financial statements issued to external users on intervallic basis. As explained by Investopedia, the main difference between financial and managerial accounting is that financial accounting is intended to provide info to parties outside the organization, while managerial accounting info is intended to help managers within the organization take decisions.
Financial Accounting Standards Board (FASB)
Short for Financial Accounting Standards Board, FASB is a seven-member independent board comprising of accounting professionals who aim at establishing and communicating standards of financial accounting and reporting in the US. The FASB Standards, commonly known as GAAP (Generally Accepted Accounting Principles), manage the preparation of corporate financial reports and are identified as authoritative by the Securities and Exchange Commission.
A financial instrument is a tradable asset of any kind which can be either cash, evidence ownership in an entity or a prescribed right to receive or deliver money or other financial instrument. According to IAS 32 and 39 it is defined as “any contract which will give rise to a financial asset of one entity and an equity instrument or financial obligation of another entity. Financial instruments can be thought of as an easily tradable package of capital, each having their own unique features.
A financial lease is a method used by a business for acquisition of equipment with payment structured over time. To give proper definition, it can be expressed as an agreement wherein the lessor receives lease payments for the covering of ownership costs. Moreover, the lessor holds the responsibility of maintenance, taxes, and insurance.
Financial report can be defined as a set of documents prepared generally by companies or government agencies at the closing of an accounting year. Usually, it includes summary of accounting data for that year, including background notes, forms, and other related info. Putting it other way, a financial report is a formal record of a business, entity, or individual’s financial activities.
A financial statement can be well defined as a formal record of any business’, individual, or entity’s financial activities.
Financial Statement Transparency
Transparency in financial statement means the statement should be users friendly and clear, everything should properly be disclosed and that should be easily understandable.
Finished Goods Inventory
Finished goods: In this part of the manufacturing process, all the work on the inventory is completed, and it is turned into the finished good and is ready to be sold.
Fixed asset is a long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash within 12 months.
A fixed asset can be defined as a long-term tangible property piece owned by a firm and used for the purpose of income-generation. A fixed asset is not expected to be consumed or converted into cash before a time period of one year.
Fixed capital is clearly referred to as the physical capital or a real capital which is not consumed or invested in the production of any real product.
Foreign Currency Translation
Foreign currency translation refers to converting the accounting figures declared in one currency into another for financial reporting purposes. As per the US GAAP regulations, the items on balance sheet are converted at the exchange rate existing on the balance sheet date. Also, items on income statement are converted as per the weighted-average exchange rate for the specific year.
Forensic accounting is also known as financial forensics or forensic accountancy which refers to a special area of expertise of accountancy in which engagements that are the outcome of anticipated or actual litigation or disputes are described. The meaning of forensic is “suitable for use in a court of law”, and the forensic accountants usually have to work to that potential and standard outcome. Forensic accountants are also known as investigative auditors and forensic auditors and they are often required at eventual trial to provide expert evidence. Specialist Forensic accounting departments are present in all the large accounting firms and also in many medium sized firms. A forensic accounting department may be further sub divided into various specializations, such as forensic accountants may specialize in personal injury claims, construction, insurance claims, royalty audits or fraud.
Forward contract can be defined as a cash market transaction which involves the delivery of the commodity being deferred until after the contract has been created.
Forward rate is defined as the rate which is applicable to any situation of financial transaction. This is the rate of capital which is applicable to be taken place in future.
Fraudulent in Financial Reporting
It’s basically the intentional effort to misstate the information in the financial statement. The purpose behind this fraud may be to conceal the internal transactions of the financial events which benefit the fraud making employee of the company. Another reason behind making the financial statement un-transparent is to give the fruitful view of the firm to the investors with the aim of attracting them. This practice of fraud abuses the public and concerned parties like the government to avoid high tax.
Free Cash Flows
After a company has finally paid off all the expenses including the investments the amount of cash that is left is known as free cash flow. It may also be known as operating cash flow minus capital expenditures. Free cash flow is actually the net cash that is left after paying off all the expenses.
Functional and Presentation Currency
International Accounting Standard 21 (IAS 21) defines functional currency as “the currency of the primary economic environment in which the entity operates”. The same Standard defines presentation currency as “the currency in which the financial statements are presented”.
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP) refers to a widely accepted set of rules, standards, conventions, and procedures for reporting financial info.
Going concern refers to a term for a company which holds resources required to continue with operations indefinitely. If a company is not a “going concern”, it indicates that the company has gone bankrupt. The term is also referred as “Going Concern Value.” The ‘going concern’ concept presumes that the business will exist long enough for all the assets of the business are utilized to the fullest.
As explained by Investopedia, goodwill is looked at as an ethereal asset on the balance sheet for it is not a physical asset like equipment and buildings. Generally, goodwill represents the value of intangible assets like good customer relations, strong brand name, good employee relations, and any kind of patents or proprietary technology. Goodwill generally arises at the time of one company being purchased by another.
Government Accounting Standards Board (GASB)
Government Accounting Standards Board (GASB) is an organization that aims at improving and creating accounting and reporting related standards or GAAP.
Gross Profit (Gross Margin)
Gross profit (gross margin) is the sales revenue less the cost of sales (or cost of goods sold).
The Framework of International Accounting Standards Board (IASB) defines historical cost as “A measurement basis according to which assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of business.”
IFRS Main Financial Statement Forms
The IFRS financial statement forms include the following: a Statement of Financial Position, a Statement of Comprehensive Income ...
Impairment of Assets
Impairment of assets can be explained as a sudden or unexpected decline in an asset’s service utility, like factory, vehicle, or property. This might result from physical damage to the asset, changes to the legal code, or obsolescence resulting from technological innovation. It is, however, possible to write off impairment of assets.
Income Statement (Profit and Loss Statement)
Income statement is a financial statement that summarizes the various transactions of a business during a specified period, showing the net profit or loss. Income statement measures a company's financial performance over a specific accounting period. It is often referred as a profit and loss statement (P&L).
Incremental cost can be defined as the encompassing changes experienced by a company within its balance sheet because of one additional unit of production. This is also referred as ‘marginal cost’.
Independence Standards Board (ISB)
The Independence Standards Board (ISB) came into existence in the month of May in 1997 owing to discussions held between the AICPA and SEC. The numerous securities related laws that were enacted by the Congress and managed by the SEC state that the credibility and integrity of the finance related reporting procedure for public entities depends, largely, on the auditors that operate independently from their auditing customers.
An intangible asset is an identifiable non-monetary asset without physical substance (IFRS, IAS 38). Intangible assets cannot be physically seen or touched.
Intellectual property is any original, business-related or inventive or any exclusive name, sign, logo or design used for commercial purposes. The intellectual property is protected by Patents on inventions, trademarks on branding device, copyrights on music or videos and trade secrets for methods that have economic value and is used commercially.
Intercompany elimination refers to the process for removal of transactions between companies included in a group in the preparation of consolidated accounts.
Interim Financial Statement
The interim financial statement is applied in order to convey the performance of a financial company before the beginning of a fiscal year and at the end of a fiscal year.
International Accounting Standards Board (IASB)
Being founded on February 6, 2001, as an independent accounting standard setter, the IASB is a London-based organization which seeks out to set and enforce standards for accounting procedures. At present, more than 100 countries require or permit companies to comply with IASB standards. Moreover, IASB is also responsible for maintaining the IFRS (International Financial Reporting Standards). The organization was preceded by the IASC (International Accounting Standards Committee) being the parent entity.
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS) are principles-based Standards, Interpretations and the Framework adopted by the International Accounting Standards Board (IASB). IFRS represent a set of internationally accepted accounting principles used by companies to prepare financial statements.
IAS 2 defines inventories as the “assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Inventories: International Accounting Standard (IAS) 2 Overview
The revised IAS 2 inventories or International Accounting Standard 2 Inventories has replaced IAS 2 inventories in 1993. These standards were applied annually from January 1, 2005. It superseded the earlier SIC-1 Consistency-Different Cost Formulas for Inventories...
Inventory Accounting refers to the part of accounting dealing with assessing and accounting for changes in inventoried assets. These changes in value can be a result of various reasons like deterioration, depreciation, obsolescence, increased demand, change in customer taste, decreased market supply, and similar more.
Inventory financing refers to a line of credit or short-term loan made to a company for purchasing products for sale.
IAS 40 defines investment property as the “property (land or a building — or part of a building — or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:
Issued Capital (Share Capital)
Issued (share) capital is the amount of nominal value of share held by the shareholders. It is the face value of the shares that have been issued to the shareholders. Issued share capital and share premium represent the amount invested by the shareholders in the company. It is also known as the subscribed capital or subscribed share capital (US - stock capital).
Just-in-time Inventory Systems
Just-in-time inventory strategy can be referred as a production strategy which is employed to increase the level of efficiency and reduce waste by receiving goods only in the form they are required in the production process, thus reducing the inventory costs. This method calls for the producers to be capable of forecasting demand accurately.
To give the legal definition of a lease, it can be rightly stated that it is a written agreement wherein the owner of a property allows a tenant to use his property for a specific time period with a certain amount of rent.
Short for London Inter-Bank Offer Rate, LIBOR is defined as the interest rate charged by one bank from another for loans (generally in Eurodollars).
An acronym for Last in, First out, the LIFO method presumes that the assets acquired or produced last are sold, used, or disposed of first.
Liquidation value can be defined as the estimated amount of money that could be received quickly through the sale of an asset or a company. Put another way, the liquidation value refers to the worth of the physical assets of a company as it steps out of business or if it were supposed to go out of business.
Long-term liabilities refer to the category of debts presented on the balance sheet of a company which are required to be repaid during the upcoming twelve months, but that instead are required to be paid back within a year or more.
Mark to Market
Mark to Market is used for measuring the fair values of those accounts, which could alter over time, like liabilities and assets. Mark to Market focuses on providing a practical appraisal of a company’s or an institution’s existing financial condition.
Market value refers to the price at which an asset is traded in the competitive auction setting. The apt definition for market value is the current quoted price at which a share of common stock or a bond is bought or sold by the investors at a specific time. The market value is, sometimes, also referred as “total market value”.
Merchandise inventory is essentially the goods, which the distributor, retailer or wholesaler acquires from the suppliers, with an intention of selling them to 3rd parties. If the goods are sold off during an accounting cycle, then the costs of these goods are charged to the price of the goods that have been sold and it is treated as expenditure in the income statement in the cycle in which the sale took place. If these very goods aren’t sold in an accounting cycle, then the prices of these goods are registered in the form of a current asset and they continue to feature in the balance sheet till the time they are all sold off.
Minimum Lease Payments
Minimum lease payments are “the payments over the lease term that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with...
Also referred as Non-controlling interest in business, minority interest is an accounting concept that deals with the part of a subsidiary corporation’s stock which is not owned by the parent corporation. Moreover, the enormity of the minority interest in the subsidiary company is usually less than 50% of outstanding shares, or the corporation would normally stop being a subsidiary of the parent corporation.
The term "net assets" is the alternative term for "equity" (i.e. the total assets of a business minus its total liabilities).
Net Book Value
The net book value can be defined in simple words as the net value of an asset. To define net book value, it can be rightly stated that it is the value at which the assets of a company are carried on its balance sheet.
Net Realizable Value
Generally, in the field of accounting, the net realizable value is a technique used to calculate the worth of an asset while in inventory. To define the net realizable value in a proper way, it can be stated as the value of an asset which can be realized by a business entity or company upon the sale of asset, minus a logical prediction of the costs associated with either the ultimate sale or the disposal of the asset in question.
Net sales refer to the amount of sales engendered by a business after deducting the returns, taxes like VAT, allowances for damaged or missing goods, and any discounts allowed. The sales number mentioned on the financial statements of a company is the net sales number, replicating these deductions.
Net worth is the difference between a company's total assets and its liabilities.
Nominal value refers to the stated value of an issued security that remains permanent as compared to its market value, which is fluctuating by nature because of factors like inflation.
Non-controlling Interest (NCI)
International Accounting Standard 27 (IAS 27) defines non-controlling interest as “the equity in a subsidiary not attributable, directly or indirectly, to a parent”. The similar term "minority interest" was previously used in standards.
Non-current assets are assets that include amounts expected to be recovered more than 12 months after the reporting period.
Non-current liability is a liability not due to be paid within 12 months during the normal course of business. Non-current liabilities are also called long-term liabilities. In accounting, non-current liabilities are shown on the right wing of the balance sheet representing the sources of funds, which are generally bounded in form of capital assets.
Normal costing is a method of costing that is used in the derivation of cost. The components used for the normal costing to derive the cost are actual costs of material, actual costs of labor and standard overhead rate that are used for allocation purpose. Since the normal costing makes use of standard overhead rates instead of actual overhead rates, this method is used in determining the product costs where there is no sudden increase in the costs. This method of normal costing is also generally accepted, and it is allowed to derive the cost of product using this technique under GAAP and IFRS.
Off Balance Sheet (OBS)
Off balance sheet refers to the assets, debts or financing activities that are not presented on the balance sheet of an entity.
Operating expenses are the expenses that are incurred in the natural course of business. These expenses generally consist of the selling and administration expenses. These expenses are revenue in nature since these are incurred in the day-to-day operations of the business and do not incur on the non-current assets.
Operating income is the income reported in the income statement of the company before taking account of the interest and taxation. In accounting and finance, this operating income is also known as earnings before interest and tax (EBIT) or profit before interest and tax (PBIT).
Operating lease is, basically, a lease contract which allows the use of an asset, but rights similar to asset’s ownership are not conveyed. According to Investopedia, an operating lease is not capitalized. It is, rather, accounted for as a rental expense. Explaining in simple words, an operating lease is a lease which features a short term as compared to the useful life of the asset or equipment which is being leased. Generally, an operating lease is used for acquiring equipment on comparatively short-term basis.
Operating Segments in accordance with IFRS 8 requires specific classes of organizations (typically those that are with securities, which are traded publicly) to reveal information pertaining to their operating segments, services and products, geographical locations of their operations as well as their important customers. This information is ideally provided on the basis of the reports of internal management, both in case of identifying operating segments and measuring of revealed segment information.
Variable overheads are the costs that are constant when calculated per unit but become variable when totaled to the volume of the output. All costs like repairs and maintenance, indirect labor, etc., are variable overhead costs.
Fra Luca Bartolomeo de Pacioli was an Italian mathematician, born in 1445 and died in 1517. He was a seminal contributor to the field of accounting, although accounting was not labeled as a discipline in his time.
The par value can be defined as the face value or stated value of a bond. If put another way, it is generally a dollar amount that is assigned to a security while representing the value contributed for each share in cash or goods.
Percentage-Of-Completion Method of Accounting
Percentage-of-completion method of accounting is based on the revenue recognition principle that provides with a framework on how to recognize revenue and expenses in the accounts of the company. The percentage-of-completion method is generally required method for the bigger construction companies for the financial accounting and taxation purposes. These companies use this method for the long-term contracts. This method’s justification relies on the matching principle in accounting, according to which it is necessary to match the revenue and expenses in the valid accounting time.
Perpetual inventory is a system in which the book inventory of the business is kept up to date to the actual inventory of the business. In this system, the complete information on the inventory and its availability is present in the books of the business. This system has made it easy to conduct business and with the help of this system, book inventory becomes almost the same as the actual warehouse inventory. This system works by interconnecting the purchase and the point-of-sale system. This helps the business in updating the inventory by altering the levels when an order is placed or sale is made.
Perpetual Inventory System
The Perpetual Inventory System can be defined as keeping the records of the stocks. You have to keep a balance of the stocks which are present as materials in the business along with the ledger records kept in a book. According to the English dictionary the word Inventory is associated with the materials which are present in the business for resale. The materials present should match with the ledger book otherwise the entire book becomes a trash. This is done to expedite the record keeping of the stores books.
Post-Closing Trial Balance
Preparing a balance sheet is the inherent part of all accounting procedures. You have to maintain a proper balance sheet in your organization in order to keep all the transactions secure and safe. The method of book keeping is also known as trial balance.
International Accounting Standard 19 (IAS 19) defines post-employment benefits as “employee benefits (other than termination benefits) which are payable after the completion of employment”.
Post-retirement benefits are for people who has served or worked to achieve a lifetime benefit for themselves. This is one form of retirement pension that is paid to the employees in their retirement years.
Pro Forma Invoice
Pro forma invoices are used by various businesses in almost all industries. A pro forma invoice can be referred as an introductory bill of sale sent to buyers in advance of a shipment or delivery of goods.
Process costing is a costing method used when it is not possible to identify separate units of production, or jobs, usually because of the continuous nature of the production processes involved. Process costing traces and accumulates direct cost, and allocates indirect cost incurred during a manufacturing process.
Cost of production refers to the total sum of money needed for the production of a particular quantity of output.
A profit center is a division within the entity that is treated separate from the corporation. A profit center is a stand-alone section of the corporation that is required to generate its own profits and perform its own accounting
In any place of profit generation and revenue production, the profit generated consequently as a result of this business is then distributed according to the final calculations. This is meant about the profit distribution.
Property, Plant and Equipment (PPE)
IAS 16 defines property, plant and equipment as the “tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period”.
International Accounting Standard 37 (IAS 37) defines a provision as “a liability of uncertain timing or amount”.
Public Company Accounting Oversight Board (PCAOB)
The PCAOB is a non-profit based organization and a private entity. It was created through the Sarbanes–Oxley Act 2000, that was mainly a US federal law. The purpose of this board is to protect the interest of various investors involved. This also serves the purpose of further interest of preparing audit reports that are fair and just. Although the PCAOB is a privately governing body, it still has a pool of government like regulatory functions that are almost same as the regulatory procedures of the private board.
Public Oversight Board (POB)
The public oversight board was created in the year 1977 by the AICPA in the USA. The board is private based independent governing body that reports and monitors the various accounting profession’s programs that are self-regulatory programs for independent auditors who are registered with the Securities and Exchange commission. There is a much needed improvement coming towards the board that will improve and strengthen the policies of the board.
Purchase Method of Accounting
Acquisition accounting, also popularly known as a purchasing method of accounting was used in the accounting standards. This term is mostly common in terms of acquisitions and mergers. The purchase methods lists the fair value of the acquired company.
In accounting, when entities are preparing accounts for acquisitions and mergers, the subsidiaries are usually purchased at their purchase cost rather than their historical cost. This technique of accounting is known as push down accounting.
Qualifying asset is “an asset that necessarily takes a substantial period of time to get ready for its intended use or sale”.
Raw materials can be explained as substance or material used in the manufacturing or primary production of goods. Generally, raw materials are natural resources like oil, wood, and iron. Raw materials are often altered for use in various processes prior to being used in the manufacturing process. Raw materials are also referred to as commodities, which are purchased and sold on commodities exchanges throughout the world.
Realized Profit (Realized Loss)
A Realized Profit (Loss) is mainly defined as the capital gain or loss which the business is likely to produce in the entire year. It is completely different from the paper profits or daily profits. Daily profit which is also known as paper profit in common parlance is the amount which a company or a business gains daily after subtracting the amount invested in business. But the Realized Profit (Loss) is the loss or gain at the end of the year. It is a taxable income of the business making it so vastly different from the paper profits.
This term is also synonymous with the term Bank Reconciliation Statement which refers to the balancing of two accounts for the sake of checking how much amount of actual money is spent. This is mainly done by matching the two accounts at the end of the accounting period.
Redemption Value is considered as the value by which the company can again purchase the security much before the time it gets matured. It is good to know that the bond can be purchased by any company at a great discount if the value of redemption exceeds the price of the purchase. Moreover, one can obtain the buy at a premium value if the purchase price is more than the redemption value.
The residual value of an asset or property can be simply explained as the worth of an asset at the end of its lease period or useful life. It is one of the major and significant elements of leasing calculus. In accountancy, residual value is also called salvage value which is the fully depreciated worth of an asset.
When you are considering the financial aspects of any particular company or store, it is necessary that you take into consideration the procedure of accounting that is imperative to estimate the value of the merchandise in the store. The total inventory value of the company gets calculated by the particular method. There are many stores and the companies that can use the inventory method quite economically with some specific identification.
Retained earnings are the profits generated by a company that are not distributed as dividends to the shareholders. The retained earnings are the sum of profits that have been retained by a company since its inception. They are reduced by the losses. Retained earnings are also known as accumulated surplus, accumulated profits, accumulated earnings, undivided profits and earned surplus.
IAS 18 defines revenue as “the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants”.
Salvage value is the projected value that an asset will realize on its sale at the end of its useful life. The price is used in accounting for decidingthe depreciation amounts, and in the tax system to determine the deductions.Salvage value is the projected resale value of an asset at the close of its useful life. You deductthe salvage value from the cost of a fixed asset to decide the quantity of the asset price that you will depreciate. Thus, salvage value is solitary used as a component of depreciation calculation.
Securities and Exchange Commission (SEC)
The Securities and Exchange Commission (SEC) was set up by the US Congress in 1934 as an individual, quasi-judicial regulatory agency during the period of Great Depression which followed the crash of 1929. The basic reason for establishing SEC was to regulate the stock market and avert corporate abuses associated to the contribution and sale of securities and corporate reporting. The SEC holds the power of licensing and regulating stock exchanges, the companies whose securities traded on them, and the dealers and brokers who carried out the trading.
Share premium is the amount received by a company over and above the face value of its shares.
Shareholders equity is the difference between total assets and total liabilities. It is also the Share capital retained in the company in addition to the retained earnings minus the treasury shares. Shareholders equity is the amount that shows how the company has been financed with the help of common shares and preferred shares. Shareholders equity is also called Share Capital, Stockholder’s Equity or Net worth.
Statement of Cash Flows
The statement of cash flows can be explained as one of the financial reports which are required to be disclosed according to IFRS and US GAAP. This document provides summative data regarding all inflows of cash received by a company from its ongoing operations as well as external investment sources. Besides, cash outflows paying for business activities as well as investments during a specific period are also included in the statement of cash flows.
Statement of Changes in Equity
A statement of changes in equity can be explained as a statement that can changes in equity for corporation features be created for partnerships, sole proprietorships, or corporations. The key purpose of this statement is to summarize the activity in take equity accounts for a certain period. Sole proprietorships and partnerships follow a similar format for their statements of changes in equity.
Statement of Comprehensive Income
Comprehensive income is the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The statement of comprehensive income illustrates the financial performance and results of operations of a particular company or entity for a period of time.
Statement of Financial Position
Statement of financial position is the new name of the balance sheet used in IFRS.
A shareholder or stockholder of a company or organization is an individual or another organization (including a corporation) that legally owns partial or full stock in a public or private corporation.
Straight-Line Method of Depreciation
Straight-line method of depreciation is the most popular and simple method of depreciation. In this method, the purchase price or the acquisition value of the asset is divided by the useful life of the asset after deducting the scrap value from the value of an asset.
Subsidiaries, Joint ventures and Associates
A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent). A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.
The temporal method can be defined as a method of translating foreign currency through the use of exchange rates based on the time of acquisition of assets and liabilities. The exchange rate involved also depends on the valuation method being used. For assets and liabilities valued at current costs, the current exchange rate is used. On the contrary, the assets valued at historical costs involve the use of historical exchange rates.
A transaction cost is the term that refers to the cost incurred in the process of carrying out a transaction. To understand the term better, here is an example: if you are in a shop purchasing a television set, you will need to research on the various vendors and different television sets. You will need to visit various stores, collect information, other consumers’ preference, ratings of the products, etc. Apart from the cost of the television set, all this effort and energy you put in the purchase process is the transaction cost.
Treasury shares are the shares which are bought back by the issuing company, reducing the number of shares outstanding on the open market.
True Interest Cost (TIC)
True Interest Cost (TIC) is the real cost of taking a loan. True interest cost includes all the subsidiary costs like late fees, discount costs, prepaid interest, and finance charges along with all the other factors that are related to the value of money. It can also be referred to the It can also refer to the real cost of issuing of the bond. The borrowers of the bond are entitled to all the true information about the bond.
Units of Production Method of Depreciation
This method of depreciation is different from the other method that reduces the life of an asset based on the numbers of years it has left as its useful life. In the unit of production depreciation, as the name suggests, the depreciation of the assets is based on the number of units it produces rather than the number of years of useful life left. Due to the depreciation calculation based on its activity, this method is also sometimes referred to as units of activity method. Simply put, in this method of depreciation, the useful life of assets depends on its productivity and its ability to produce the total number of units.
Unrealized Gains & Losses
An unrealized loss exists when the value of stock decreases after being purchased by an investor but he/she has not yet sold it.
Unsecured debt is the famous term used by the finance specialists. Unsecured debt is referred to as the type of debt or general obligation which is not applied in collateral efforts on the specific assets of the borrower. This usually occurs in cases when the borrower is declared bankrupt or he or she fails to meet the terms for the repayment of the loan or debt.
The Generally Accepted Accounting Principles in the US (US GAAP) refer to the accounting rules used in United States to organize, present, and report financial statements for an assortment of entities which include privately held and publicly traded companies, non-profit organizations, and governments. The term is confined to the US and is, therefore, generally abbreviated as US GAAP. But theoretically, the term "GAAP" covers the entire accounting industry, rather than only the US.
US GAAP vs. IFRS
The main points of comparison between US GAAP and IFRS include...
Work in Progress (WIP)
Work in progress (WIP) is the part of inventory that is currently being worked on and is yet in the production process.
- Debt ratios
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- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
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Most WantedFinancial Terms
- Debt-to-Equity Ratio
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- Financial Leverage
- Current Ratio
- Accounts Payable Turnover Ratio
- Return On Capital Employed (ROCE)
- Receivable Turnover Ratio
- Debt Service Coverage Ratio
- Interest Coverage Ratio (ICR)
- Debt Ratio
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