Letter of Credit

A letter of credit is a promise to pay. Banks issue letters of credit as a way to ensure sellers that they will get paid as long as they do what they've agreed to do.

Terms in LC

·        Abbreviations for 'letter of credit' include L/C, LC, and LOC

·         Applicant - the buyer in a transaction

·         Beneficiary - the seller or ultimate recipient of funds

·         Issuing bank - the bank that promises to pay

·         Advising bank - helps the beneficiary use the letter of credit

Process of LC

A seller only gets paid after performing specific actions that the buyer and seller agree to.

For example, the seller may have to deliver merchandise to a shipyard in order to satisfy requirements for the letter of credit. Once the merchandise is delivered, the seller receives documentation proving that he made delivery. The letter of credit now must be paid even if something happens to the merchandise. If a crane falls on the merchandise or the ship sinks, it's not the seller's problem.

To pay on a letter of credit, banks simply review documents proving that a seller performed his required actions. They do not worry about the quality of goods or other items that may be important to the buyer and seller.

Repo and Reverse Repo

Repo (Repurchase) rate is the rate at which the Central Bank of a country lends shot-term money to the banks against securities. When the repo rate increases borrowing from Central bank becomes more expensive.  Therefore, we can say that in case,  Central Bank wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the Central Bank.  The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns.     An increase in the reverse repo rate  means that the Central Bank  is ready to borrow money from the banks at a higher rate  of interest. As a result, banks would prefer to keep more and more surplus funds with Central Bank.

Forensic Accounting (FA)

Simply put, forensic accounting is accounting that is suitable for legal review, offering the highest level of assurance, and including the now generally accepted connotation of having been arrived at in a scientific fashion. Forensic accountants, also referred to as forensic auditors or investigative auditors, often have to give expert evidence at the eventual trial.

External Auditors find out the deliberate misstatements only but the Forensic Accountants find out the misstatements deliberately. External auditors look at the numbers but the forensic auditors look beyond the numbers.

Forensic accountant takes a more proactive, skeptical approach in examining the books of Accounting. They make no assumption of management integrity (if they can assume so then there is no need for their appointment) show less concerns for the arithmetical accuracy have nothing to do with the Accounting or Assurance standards but are keen in exposing any possibility of fraud.

Foreign Direct Investment (FII)

An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign investment refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.

The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:

•           by incorporating a wholly owned subsidiary or company

•           by acquiring shares in an associated enterprise

•           through a merger or an acquisition of an unrelated enterprise

•           participating in an equity joint venture with another investor or enterprise

Environment Audit

An assessment of the extent to which an organization is observing practices that seek to minimize harm to the environment. Environmental auditing started developing at the beginning of 70s of the past century in the United States of America and in the Western Europe. In that period the developed countries were adopting the environmental legislation in order to reduce the harmful consequences of the companies' actions that had affected the environment.

Independent third party assessment of the current status of an organization's compliance with local environmental laws and regulations.

Cloud Computing

Cloud computing refers to the delivery of computing and storage capacity as a service to a heterogeneous community of end-recipients. Cloud computing is simply a set of pooled computing resources and services delivered over the web. When you diagram the relationships between all the elements it resembles a cloud.

Cloud computing is using the internet to access someone else's software running on Someone else's hardware in someone else's data center. It is a style of computing in which IT-related capabilities are provided “as a service”, allowing users to access technology-enabled services from the Internet ("in the cloud") without knowledge of, expertise with, or control over the technology infrastructure that supports them. An emerging computing paradigm where data and services reside in massively scalable data centers and can be ubiquitously accessed from any connected devices over the internet. Cloud computing environments support grid computing by quickly providing physical and virtual servers on which the grid applications can run.

Book Building

When companies are on the look out to raise money for their business operations, they use various means for the same. Two of the most popular means to raise money are Initial Public Offer (IPO) and Follow on Public Offer (FPO). 

During the IPO or FPO, the company offers its shares to the public either at fixed price or offers a price range, so that the investors can decide on the right price. The method of offering shares by providing a price range is called as book building method

Book building is actually a price discovery method. In this method, the company doesn't fix up a particular price for the shares, but instead gives a price range, e.g. USDs 80-100. When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. USD 80, USD 90 or USD 100. They can bid for the shares at any price within this range.

Based on the demand and supply of the shares, the final price is fixed. The lowest price (USD 80) is known as the floor price and the highest price (USD 100) is known as cap price.

The price at which the shares are allotted is known as cut off price

Mutual Fund

A mutual fund is a type of professionally-managed collective investment scheme that pools money from many investors to purchase securities and Invest in capital Market. By investing in mutual fund the investor became a part of owner of assets of mutual fund.
Features
-Pooling of Resources
-Professional management
Net Assets Value of Mutual Fund (NAV)
The NAV of MF is the amount of which the unit holder would receive if the mutual fund were wound up today.
 Return to this investors-owner, emanate from the interplay of two elements (i) NAV and (ii) Cost of mutual fund. NAV will be calculated every trading day.

Capital Market

Capital Market is market for financial assets which have long and indefinite maturity.Both the stock and bond markets are parts of the capital markets.

Unlike money market instruments the capital market instruments become mature for the period above one year.

Capital market provides long term debt and equity finance for the government and the corporate sector. 

Capital market can be classified into primary and secondary markets. The primary market is a market for new shares, where as in the secondary market the existing securities are traded.

A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year

Money Market

The money market is nowadays a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less.

The money market is better known as a place for large institutions and government to manage their short-term cash needs. However, individual investors have access to the market through a variety of different securities.
One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations. This limits access for the individual investor.

Capital Budgeting

Capital Budgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures.


Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.

Popular methods of capital budgeting include net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period.

Adjusted NPV

Adjusted NPV is the NPV of project after considering the effect of financing. Two adjustment are relavant here  (a) Issue cost
(b) Tax shield on interest on debt
In other words The Net Present Value (NPV) of a project if financed solely by equity plus the Present Value (PV) of any financing benefits (the additional effects of debt).

 Adjusted Present Value (APV) is the net present value of a project if financed solely by ownership equity plus the present value of all the benefits of financing.
Steps in computation:
Step 1: Compute NPV on assumption that the project fully financed by equity.(Discount at cost of equity)
Step 2: Compute issue cost( It is already in today's value no need to discount)
Step 3: Compute tax saved on interest payable
Step 4: Compute PV of Tax Saved (at pretax cost of debt)
Step 5:ANPV=Base case NPV-Issue cost+PV of Tax Shield (Step1-Step 2+Step 4)

Profitability Index

Profitability Index is the measure of productivity of money means how much do we get for every single unit of money we spend.This is crucial when money is in short supply
Profitability index (PI), also known as profit investment ratio (PIR) and value investment ratio (VIR), is the ratio of payoff to investment of a proposed project

PI is the ratio of present value of Inflow to present value of outflow with cost of capital being used as the discount rate.
Steps in computation:
Step1: Compute Present Value (PV) of Inflow
Step2: Compute PV of Outflow
Step3: PVI / PVO (Step1 / Step2)

If the index is greater than one the project will be selected
Between two project one with higher PI will be selected

Penny Stocks

Penny Stocks are low-priced stocks. There is no formal definition. Stocks that sell for less than $5 or their net tangible assets are less than 2 million dollars are considered as penny stocks. In India stocks under a price of Rs 50 are penny stocks.

The appeal of penny stocks comes from its low price as also investor’s psychology. Investors tend to think that a stock quoting Rs 10 rising to 20 is more possible than a stock quoting Rs 2700 growing to Rs 5400. If the fortune of the penny stock company turns around there is plentiful of opportunity to see share price appreciation. Penny stocks are popular among speculators.

Escrow Account

An escrow account is a designated account, the funds of which can be utilized only for a specified purpose. In other words, the bankers to the issue keep the funds in the escrow account on behalf of the prospective buyers. These funds are not available to the company till the issue is completed and allocation is made.

Primary Market

Stock Market generally divided into two segments
Primary market and Secondary market.

The primary market is the market in which investors have the first opportunity to buy a newly issued security.The primary market is not a physical place, it is merely refers to a situation where the action is not among investors inter-se but is between a company and the investors.Eg. Initial Public Offer (IPO), it includes right issue.
When a company needs an extremely large capital to run its business operations it cannot fund it all by itself.Hence it needs shareholders, which can be achieved only through primary market.

Excel Tip- Highlight the Row

Using the following code we can able to highlight the row where the cursor is available without affecting the data
Copy the code -Right click Tab Name > View code and paste the code there on the VBE window.

Audit Programme

An Audit programme is predetermined detailed plan of auditing work to be performed, specifying the procedure to be followed in verification of each item in the financial statement,allocation of the audit staff and the time framed to be allowed in conducting audit.
The audit programme also contains the audit objectives for each area of work to be performed.Thus, an audit programmes is written plan for conduct of an audit specifying what work to be done, when to be done and by whom to be done.

Carbon Credit

As nations have progressed we have been emitting carbon, or gases which result in warming of the globe. Some decades ago a debate started on how to reduce the emission of harmful gases that contributes to the greenhouse effect that causes global warming. So, countries came together and signed an agreement named the Kyoto Protocol.

The Kyoto Protocol has created a mechanism under which countries that have been emitting more carbon and other gases (greenhouse gases include ozone, carbon dioxide, methane, nitrous oxide and even water vapour) have voluntarily decided that they will bring down the level of carbon they are emitting to the levels of early 1990s.

Developed countries, mostly European, had said that they will bring down the level in the period from 2008 to 2012. In 2008, these developed countries have decided on different norms to bring down the level of emission fixed for their companies and factories.

A company has two ways to reduce emissions. One, it can reduce the GHG (greenhouse gases) by adopting new technology or improving upon the existing technology to attain the new norms for emission of gases. Or it can tie up with developing nations and help them set up new technology that is eco-friendly, thereby helping developing country or its companies 'earn' credits.

India, China and some other Asian countries have the advantage because they are developing countries. Any company, factories or farm owner in India can get linked to United Nations Framework Convention on Climate Change and know the 'standard' level of carbon emission allowed for its outfit or activity. The extent to which I am emitting less carbon (as per standard fixed by UNFCCC) I get credited in a developing country. This is called carbon credit.

These credits are bought over by the companies of developed countries -- mostly Europeans -- because the United States has not signed the Kyoto Protocol.

Carbon credits are generated by enterprises in the developing world that shift to cleaner technologies and thereby save on energy consumption, consequently reducing their greenhouse gas emissions. For each tonne of carbon dioxide (the major GHG) emission avoided, the entity can get a carbon emission certificate which they can sell either immediately or through a futures market, just like any other commodity.

The certificates are sold to entities in rich countries, like power utilities, who have emission reduction targets to achieve and find it cheaper to buy 'offsetting' certificates rather than do a clean-up in their own backyard.

Articles of Association

A company is an incorporated body.  So there should be some rules and regulations are to be formed for the management of its internal affairs and conduct of its business as well as the relation between the members and the company.  Moreover the rights and duties of its members and the company are to be recorded.  There comes the need and origin of Articles of Association.

The Articles of Association is a document that contains the purpose of the company as well as the duties and responsibilities of its members defined and recorded clearly.  It is an important document which needs to be filed with the Registrar of companies.

It is the document for internal management of a company, it is necessary to know its contents before anyone who deals with company.

It is a document which is accessible to anyone just like memorandum of association

Memorandum of Association

A document that regulates a company's external activities and must be drawn up on the formation of a registered or incorporated company. As the company's charter it (together with the company's articles of association) forms the company's constitution.

The memorandum of association gives the company's name, names of its members (shareholders) and number of shares held by them, and location of its registered office. It also states the company's (1) objectives, (2) amount of authorized share capital, (3) whether liability of its members is limited by shares or by guaranty, and (4) what type of contracts the company is allowed to enter into.

Sweat Equity Shares

It means equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights, or value additions, by whatever name called.

Normally this issue should be authorized by company in general meeting by passing special resolution. 

Preference shares

Preference shares as those shares which carry preferential rights as the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company.

Thus, both the preferential rights viz. (a) preference in payment of dividend and (b) preference in repayment of capital in case of winding up of the company, must attach to preference shares.

The rate of dividend on these shares is fixed and the dividend on these shares must be paid before any dividend is paid to ordinary shares.

The main benefit to owning preference shares are that the investor has a greater claim on the company's assets than common stockholders.

In general, there are four different types of preferred stock: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock. also called preferred stock.

Forfeiture of Shares

The term ‘forfeiture’ actually means taking away of property on breach of a conditions. It is very common that one or more shareholders fail to pay their allotment and/or calls on the due dates, which results forfeiture of Shares. Forfeiture of Shares is the action taken by the company to cancel the shares.

The directors are usually empowered by article of association to forfeit those shares by serving proper notice to the defaulting shareholder. When shares are forfeited, the title of such shareholders is extinguished but the amount paid to date in not refunded to him. The shareholder then has no further claim on company.

The power of forfeiture must be excised strictly having regard to the rules and regulations’ provided in the articles of association and it should be bona fide in the interest of the company.

Calls-in-Advance

Calls-in-Advance generally arises when there is an over subscription of shares. Here, the excess application money received is adjusted against the amount due on allotment or calls. The excess application money after adjustment for allotment should be transferred to a special account called ‘Calls-in-Advance Account’, if the prospectus so provides. Sometimes, to avoid the botheration of paying calls from time to time, some shareholders may prefer to pay the entire amount at the time of allotment. In such a situation, the advance money in respect of future calls should also be transferred to Calls-in-Advance Account and it is adjusted when calls are made.

Interest may be provided if company authorise

The accounting entries:

• For transferring excess application money

           Share Application Account (Debit) - (adjustment for excess)

                To Calls-in-Advance Account (Credit)

•  For money received in advance against call

           Bank Account (debit)

                To Calls-in-Advance Account (Credit)

• For adjusting with call

           Calls-in-Advance Account (Debit)

                To Call(s) Account

Calls-in-arrear

Calls-in-arrear refer to that portion of the capital, which has been called up but not yet paid by the shareholders. When a shareholder fail to pay the amount due on allotment and/or calls, the allotment account and/or calls account will show debit balance equal to total unpaid amounts of each instalment. Generally such amount is transferred to a special account called ‘Calls-in-arrear Account’

The main purpose of opening a Calls-in-arrear account is to close allotment or any other Call account with the amounts not yet received.

The entry will be:

Calls-in-arrear Account (Debit)

                To Sharer Allotment Account (Credit)

                To Share Call Account     (Credit)

Equity Shares

Equity shares are those shares which are ordinary in the course of company's business. They are also called as ordinary shares. These share holders do not enjoy preference regarding payment of dividend and repayment of capital. Equity shareholders are paid dividend out of the profits made by a company.

Equity shares are the shares which carry voting rights; they do not carry a fixed rate of dividend, their dividend depends upon the volume of profits available for distribution, they get high dividend when the company makes good profits but they do not get anything when the profits are inadequate

They do not get their dividend or refund of share capital before preference share holders are paid

Share capital

Generally ‘Capital’ means a particular amount of money used in business for the purpose of earning revenue. Share capital us that part of the capital of a company which is represented by the total nominal value of the shares which it has issued. In the context of the company law, this term is used in the following senses:

Nominal or Authorized Capital: It means the face value (face value is the amount stated on a share certificate) of the shares which a company is authorized to issue by its memorandum. E.g. A. Ltd has been incorporated with an authorised capital of USD 1000,000 divided into 100,000 shares of USD 10 each.

Issued Capital: It is that part of the Authorised capital which is issued to public for subscription and allotment, say 65,000 shares of USD 10 each.

Subscribed Capital: It is that part of the Issued capital which has been subscribed by the public, say 60,000 shares of USD 10 each.

Called-up Capital: It is that part of the subscribed capital which the directors have called up in order to carry on business of the company, say, USD 5 per shares has been called up, i.e., 60000x$ 5=$300,000.

Paid-up Capital: It is that part of the called up capital which is actually received in cash by the company, say $ 290000 (one shareholder holding 5000 shares failed to pay the call @ $ 2 per share)

Uncalled Capital:  It is that part of the subscribed capital which has not yet been called up by the directors. The difference between the subscribed capital and called up capital is represented by the uncalled capital.

Reserve Capital: A limited company may, by resolution, determine that any portion of its share capital which has not been already called-up shall not be capable of being called up, except in the event and for the purposes of the company being wound up. 

Matching Concept

The matching concept is an accounting principle that requires the identification and recording of expenses associated with revenue earned and recognized during the same accounting period.

In order to reach accurate net income figure, the expenses incurred to earn the revenues recognized during the accounting period should be recognized in that time period and not in the next or previous. This is called matching principle of accounting.

Example:

$40,000 worth of sales is made in 2011. Total purchases of inventory were $30,000 of which $1000 remained on hand at the end of 2011. The cost of earnings is $40,000 revenue is $29000 [$30000 minus $1000] and this should be recognized in 2011 thereby yielding a gross profit of $11000.

Bill of Exchange

A bill of exchange comes from an open credit arrangement where the creditor gets the documentary evidence of the amount owing and also the terms of payment. The buyer must pay the amount shown on the bill of exchange on the specified date. Therefore, a bill of exchange can be defined as a legal evidence of debt (an acknowledgement of debt), and which fixes the date of payment. If the buyer has some claim over the seller (e.g. quantity received less than ordered or defective goods delivered, etc.) the former may sue the latter for relief. But this suit has nothing to do with the question of payment of bill of exchange.

“A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of instrument.”

Three parties in a bill of exchange

1.  Drawer ( Maker)
2. Drawee (acceptor or debtor)
3. Payee ( the person who receives money , drawer may make bill himself)

Bills receivable and Bills Payable

Every bill has to be accepted by drawee and it made payable to payee, Since the drawer (creditor) draws the bill, a bill from the point of view of the drawer is called a Bills Receivable because the money receivable by him.

On the other hand, the same bill from the point of view of the drawee (the debtor, who accept the bill) is called a Bills Payable because the money is payable by him.

Advantages of bill of exchange are the drawer c can obtain payment from banker before its due date and a bill can be transferred freely if it is bearer instrument.

Corporate Governance

Corporate governance refers to the set of systems, principles and processes by which a company is governed. They provide the guidelines as to how the company can be directed or controlled such that it can fulfil its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society. The management of the company hence assumes the role of a trustee for all the others.
Corporate governance is based on principles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions, complying with all the laws of the land, accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner.

XBRL

Extensible Business Reporting Language (XBRL) is an international standard business language developed by XBRL International Inc. XBRL is a mode of electronic communication of business and financial data to provide a common gateway for smooth management and control over the financial data, information and various other benefits.

Benefits

1. It is easy to prepare in XBRL

2. It is easy to make analysis and

3. Very easy way of communication of business information by corporate.

4. Efficient cost management

5. Accuracy and reliability of data

A large number of data collected through XBRL, it will enhance the ministry or government’s capabilities in formulation of policies and other regulatory functions which is an added advantage towards the corporate. 

Insider Trading

The buying or selling of a security by a person who has access to material, nonpublic information about the security or company. Insider trading is illegal.Trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information.

Insider trading is legal once the material information has been made public, at which time the insider has no direct advantage over other investors.

However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company.

Statutory Liquidity Ratio (SLR)

Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. In short it indicates  the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities.

The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR).  An increase in SLR  also restrict the bank’s leverage position to pump more money into the economy.

Bank Rate

Bank Rate is the rate at which central bank of the country ( Bank Rate in India is decided by RBI)  allows finance to commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Base Rate / Benchmark Prime Lending Rate.  Thus any revision in the Bank rate indicates that it is likely that interest rates on your deposits are likely to either go up or go down,  and it can also indicate  an increase or decrease in your EMI.

Cash Reserve Ratio (CRR)

CRR means Cash Reserve Ratio.  Banks in India are required to hold a certain proportion of their deposits in the form of  cash.  However, actually Banks  don’t hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as  equivalent to holding cash with RBI. This minimum ratio (that is the part of the total deposits  to be held as cash) is stipulated by the 

RBI and is known as the CRR or  Cash Reserve Ratio. 

Thus, When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 6%, the banks will have to hold additional Rs 6 with  RBI and Bank will be able to use only Rs 94 for investments and lending / credit purpose.

Therefore,  higher the  ratio (i.e. CRR), the lower is the amount that banks will be able to  use for lending and investment.  This power of RBI to reduce the lendable amount by increasing the CRR,  makes it an instrument in the hands of a central bank through which it can control the amount that banks lend.

Internal Rate of Return

Internal Rate of Return (IRR) is the discount rate at which NPV is equal to Zero. The logic is If at a discount rate NPV is positive, it means that the actual rate of return is greater than the discount rate. If the NPV is negative, it means that the actual rate of return is less than the discount rate. If the NPV is Zero, it means that actual rate of return is neither greater than nor less than the discount rate. Hence IRR represents the actual rate of return earned on an investment.

A project will be selected if the IRR is greater than targeted rate of return
Between two project a project with higher IRR will be selected

Net Present Value

 Net Present Value (NPV) is the difference between sum of the present values (PVs) of the individual cash flows both inflows and outflows.NPV is used in capital budgeting to analyze the profitability of an investment or project. A project with positive NPV is feasible project.

Steps in calculation
Step 1: Identify the discount rate for finding present value
Step 2: Compute the PV of inflow
Step 3: Compute the PV of outflow
Step 4: NPV= PVI-PVO ( Step 2-Step 3)

Between two Project the one which gives higher NPV will be selected.

Time Value of Money

Time Value of Money (TVM) is the first and the most important of lessons that you should ever learn in finance.

• TVM is Money received today is greater than money received tomorrow because of money has time value. Eg. USD 100 today is not USD 100 a year later

• TVM is the reward for the postponement of consumption of money.
• TVM is aggregate of inflation rate, real time return from risk free investment and risk premium.

Inflation

Inflation means an overall increase in the prices of goods and services. It is a decrease in the value of a currency. The Currency used for purchase goods and services yesterday are not enough for today, the cost increased over and above time value of money.

It can be measured in three ways
1. Consumer Price Index (CPI)
    The Consumer Price Index measures prices of a selection of goods and services purchased by a "typical    consumer".The inflation rate is the percentage rate of change of a price index over time.CPI is the most common measurement.

2. Producer Price Indices (PPI)

    Measures the average change over time in the selling prices received by domestic producers for their output.

In India and the United States, an earlier version of the PPI was called the Wholesale Price Index.

3. Commodity Price Indices 

    Which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee.

4.Core Price Indices

   Core Inflation is a measurement of non-volatile goods such as food and non-precious metals. It leaves out goods like oil because oil's price is subject to wild fluctuations.

Golden Rules of Accounting

It is classified in to three
1.REAL ACCOUNTS
Debit: The Receiver
Credit: The Giver
2.PERSONAL ACCOUNTS 
Debit:What Comes in 
Credit:What Goes out
3.NOMINAL ACCOUNTS
Debit:all Expenses and Lose 
Credit: all Incomes and Revenues 

Per Capita Income

The per capita income indicates the changes in economic progress in terms of goods and services available per head of population.It obtained by dividing the national income by the number of people.
The concept of percapita income is an index of changes in the standard of living of people a country.The greater the percapita income the higher will be the standard of living and vice versa.However it does not indicates the real standard of living of every man.It shows merely an average income of the people.
 
                               National Income
Percapita Income =  _____________

                               Size of Population

Gross National Product (GNP)

If we add the net income from abroad to GDP, we get GNP.It refers to total market value of all final goods and services produced in a year.It is the aggregate value of the current production of goods and services flowing to the government, to consumers and business.
In short
GNP=GDP + Net Income from Abroad.

Gross Domestic Products(GDP)

This is the money value of all final goods and services produced by normal residents (Nationals residing in a country) in an accounting year in the domestic territory of a country. Thus it does not include the income from abroad. GDP per capita is often considered an indicator of a country's standard of living.
In short

GDP = private consumption + gross investment + government spending + (exports − imports)

National Income

National Income is generally defined as income of a nation in one year.It is the money value of all final goods and services produced in a country.In other words, it is the money value of the end result of all economic activities of a country.
Economic activities generate two kinds of flows-
                              -Money flows
                              -Product flows
Money flows refers to prices of factors of production such as rent, wages,interest and profit.Product flows refers to flows of consumer goods and services and productive assets

Law of Diminishing Marginal Utility

This law explains human behaviour (Consumer behaviour) in relation to consumption of commodity.As a consumer consumes more and more of a commodity, the utility (satisfying power) derived by him from the every subsequent unit goes of falling (diminishing).
It is the experience of every consumer that as he goes on consuming a particular commodity ; each successive unit gives him lesser and lesser satisfaction.In other words, the total utility goes on increasing, but at diminishing rate.

Bank Reconciliation statement (BRS)

Bank reconciliation statement is the statement which contain a complete and satisfactory explanation of the differences in balances as per the cash book and bank statement.The preparation of BRS is not part of the double entry bookkeeping system.It is just a procedure to prove the cash book balance.

It should be noted that:

(a) a BRS is to be prepared whenever a bank statement received; and

(b) It is prepared on a stated day.

Need for Bank reconciliation statement

1. It reflects the actual bank balance position

2. It helps to detect any mistake in the cash book and in the pass book

3. It prevents frauds in recording the banking transactions.

4. It explain any delay in collection of cheques 

5. It identifies valid transactions recorded by one party but not by the other.

In short BRS is the auditing tool for management.

Bad Debts/Provision

Bad debt is an amount owing from a debtor which is not expected to received.In business, debts become irrecoverable owing to various reason, namely, insolvency, willful non-payment,and like that.Though bad debt us a loss to the business, it is treated as an operating expenses of doing business, since it is inevitable to any business that extend credit to its customers.
It can be argued that the transfer of bad debts to profit and loss account should be made in the year in which the sale took place as only such treatment will conform to the matching concept.But it would be possible though difficult to reopen the earlier period's accounts but this is seldom done in practice.

Provision for bad debts
At the end of each accounting period, the firm knows that it will  suffer a loss due to bad debts in future.An accurate estimate of the apprehended bad debts losses can nevertheless be made, because the firm does not know which debtor will fail t make payment in future.Therefore, the book value of sundry debtors may not be the actual realizable value.
Towards the endeavour of ascertaining the true (or fair) trading profit,a portion of profit is set aside in a special account called 'Provision for Bad and Doubtful Debts' to adjust the loss of future bad debts which is based on approximations.But we cannot write off the accounts of doubtful debtors at once, the value of the sundry debtors cannot be reduced directly.This is so because there may still a chance of recovery (Partly or fully) of debt.
The estimate doubtful debts (Provision for Bad and Doubtful debts account) is shown as a separate figure in the balance sheet

Capital Expenditure-CAPEX

Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations.
Theses assets or service acquired which will benefit the business more than one accounting period.

Subdivision of Ledger

Generally the following three kind of ledgers are maintained by organisations.
Debtors Ledger
It may contain the accounts of all the customers to whom goods have been sold on credit.This ledger is also called customer's ledger or sales ledger

Creditors Ledger
It may contain the accounts of all the suppliers from who goods have been purchased in credit. this ledger is also called supplier's ledger or purchase ledger.

General Ledger
It may contain all the residual accounts, mainly real and nominal accounts.This ledger is also called Nominal ledger

Sales Day Book

Sales Day Book: It is subsidiary book of account in which only transactions related to sales are recorded and not like general journal in which we record all monitory transactions. If the volume of transactions is huge then we use different subsidiary books of accounts for Sales, Purchase, Sales Returns, Purchase Returns,Bills Receivable, Bills Payable,and general journal to record all transactions.

Discount,Trade discount and Rebate

DiscountDiscount will be given for Credit customers like if you pay within one week 10%, within 15 days 5% and more than 15 days no discount.Deduction from the face amount of an invoice, made in advance of its payment.


Trade Discount
A trade discount is the amount by which a manufacturer reduces the retail price of a product when it sells to a re-seller, rather than to the end customer.The trade discount reflects the re-seller's profit margin and usually varies directly with the quantity of the item purchased.Rebate is like buy for 100/- and pay only USD 95/-.


Rebate

Return of a portion of a purchase price by a seller to a buyer, usually on purchase of a specified quantity, or value, of goods within a specified period. Unlike discount (which is deducted in advance of payment), rebate is given after the payment of full invoice amount.

Cash Book

The cash book is the subdivision of the book of original entry, recording transaction involving receipts or payment of cash.
All cash transaction first entered in the cash book and then posted to from cash book into ledger.Cash book is maintained in the form of ledger with narration.Practically, the cash book is the substitute for cash account in the ledger.

Purchase Day book

A purchase day book shows all the entries related to purchases made during a day, it is the primary book of records, at the same time purchase return entry are also recorded in this book.
On receiving the goods and invoice, the receiving department compare both with copy of purchase order placed by purchase department. If everything is found in order, the goods are sent to stores.On the basis of invoice received from the supplier, necessary record is made in purchase day book.

Depreciation

Depreciation  is  a measure of the wearing out, consumption  or other loss of value of a depreciable asset arising from use,effluxion of time or obsolescence through    technology  and market    changes.Depreciation  is  allocated  so  as  to  charge  a  fair  proportion  of  the depreciable  amount  in  each  accounting  period  during  the  expected useful  life  of  the  asset.  Depreciation  includes  amortisation  of  assets whose  useful  life  is  predetermined. (Indian Accounting standard 6).

Objectives of Providing Depreciation

1. To Find out net profit or loss for an accounting period, the expenses includes the portion of cost of fixed assets that has expired during the period. Unless depreciation is charged , the true profit of particular period cannot be ascertained.

2. Unless the depreciation is charged, the assets may be overstated in the balance sheet.Hence, the value  at which the fixed assets will be shown in the balance sheet is its original cost less the amount charged as depreciation.This value called written down value.

3. In order to replace the asset.If the depreciation not charged and profit available for distribution not reduced, it is quite likely that the whole of the profit may be withdrawn during the life of the asset.In such case, the business unit may not have sufficient funds left for replacement.

 

Trial balance

For every transaction in the double entry system, equal amounts of debit and crdit are recorded in the books of account.if all the transactions have been recorded perfectly, we can say that the total of the debit balance should be equal total of credit balances.
The account balance are used to prepare the final accounts. An attempt is first made to check the accuracy of the recording and posting of each transaction as welll as the correct balancinf of accout by means of preparing a schedule if balance of all accourns known as trial balance.
A trial balance is simply a list of the names and balances of all accounts in the ledger and cash book and listed in the order in which they appear in the ledger

Journal and Ledger

Journal
This is first book in which the transactions of a business unit are recorded.
Each records in the journal book called entry.
As the journal is the first book in which entries are recorded, a journal is also known as book of original entry.
Before journal entry is passed it is necessary to decide for each transaction, what are the accounts involved. It also necessary that the accounts to be debited or credited are identified.

Ledger
It is the principal book of accounts where similar transaction relating to particular person or thing are recorded.
The journal is used to record transaction in ledger.Now a day because of computerization the ledger account is posted as and when journal passed.

Double Entry System

Every business transaction affects two or more accounts. Under Double Entry System, equal debit and credit entries are made for every transaction. If more than two accounts affected by a transaction , the sum of debit entries must be equal to sum of the credit entries

It can be explained by simple equation :

Liabilities + Capital = Assets

Increases on the left hand side of a ledger  are called credit balance 

Increases on the right side side of a ledger are called debit balance

Similarly, Decreases on the left hand side are called debit balance and

               Decreases on the right hand side are called credit balance