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Accounting Terminology Notes-CA Foundation

Accounting Terminology Notes-CA Foundation

Q1. What are the key terms in Accounting Terminology?


Acceptance: It is a process through which drawee (i.e. buyer) accepts the bill of exchange of drawer (i.e. seller) by ways of signing the bill and giving his assent to an unconditional obligation to pay the same on or before maturity date.

Accounting Policies: Methods and principles used for preparing the financial statements of the enterprise.

Accrual basis of accounting: Recording the income and expenses as and when earned irrespective of the receipt & payment schedule. It is also balled as mercantile basis of accounting.

Accrued Asset: Is an unenforceable claim against a person which has accumulated as a result of rendering service or with the passage of time but yet not invoiced.

Accrued expense: It is an accounting expense which is recognised in advance but not payable at present.

Accrued liability: Is an unenforceable claim by a person which has accumulated as a result of receipt of service or with the passage of time. Accrued Revenue: It is an accounting receipt which has been earned but not received till date.

Accumulated Depreciation: Is the cumulative depreciation on depreciable assets for the period beginning from the date of purchase and ending on the date of reporting in financial statement.

Amortisation: is the way of allocating the cost of asset which is intangible in native over a period of time which may be prescribed and can be for more than one accounting period.

Annual Report: Is the statement providing information to the shareholders about the financial health of the business. It includes Director’s Report, Auditor’s Report. Balance Sheet, Profit & Loss A/c and Notes to Accounts’ and other necessary information as require by statute.

Appropriation Account: Is a section of Profit and Loss A/c where the distribution of Net Profit (calculated in Profit and Loss A/c) for transferring to reserves or distributing as dividend etc. are shown separately.

Asset: Are property or legal right which are owned or controlled by an organisation and provides future economic benefits.

Authorised Share Capital: Is the maximum number of shares and par value per share to which company is authorised for issuing at any point of time. It is also called as Nominal Share Capital and is the given in Memorandum of Association. A company cannot issue shares in excess of such authorised share capital.

Average Cost: Cost per unit of item.

It is calculated by:

— Total cost of all times No. of items

Bad debts: Debts owned by the company which cannot be recovered and is considered as business loss hence debited to Profit & Loss Account. Balance Sheet: Is the statement of assets and liabilities along with owner’s equity at a given point of time.

Bills of Exchange: Is an instrument in writing which contains an unconditional order given by the creditor to debtor to pay at sight or after a certain period, a certain sum of money to or to the order of the certain specified person or the beared.

Bonus Shares: Are the Shares allotted by the company to its existing shareholders by way of capitalising the existing profits held by the company. Book Value: Is the value at which various assets and securities are recorded in books of accounts or financial statements of business. Borrowing Cost: Is the cost of borrowed funds. It includes interest cost and other ancillary cost incurred while borrowing funds for business purpose. Bonds/Debentures: Is a long term security issued by a company yielding fixed rate of interest and to be repaid after the end of issue term.

Call: Demand made by the company to pay a part of whole of the sum payable on shares/debenture allotted by the company.

Called up Share Capital: Is the part of sum demanded by the company to be paid by the shareholders to the company against the shares issued. Capital: Are the funds invested in company along with accumulated wealth of the company.

Capital Asset: Assets other than those held for sale in ordinary course of business. These include tangible and intangible assets investments, etc. Capital = Assets – Liabilities

Capital Commitment: Is the amount of money planned by the company to be spend for capital expenditure for which company has entered into contract with third party.

Capital employed: Are the funds deployed by the company in various assets, investments and working capital required forthe business operations. Capital Profit/Capital Loss: Are profit/loss not earned in the ordinary course of business. It may be earned through sale of fixed assets, investments, premium on issue of shares and debentures. If the profit earned from above is negative, it is called as capital loss.

Capital Reserve: Is the portion of funds set-a-side by the business for long term investments or expenses and are non-distributable i.e. this reserve cannot be utilised for dividend distribution.

Capital work in progress: Expenses incurred on such assets which are not completed on the balance sheet date. It is separately shown under the head Non-current Assets.

Cash: Is a balance sheet item shown under the head ‘Current Assets’. It complises of cash in hand, cash at bank and demand deposits with banks.

Cash equivalents: Are the short term investments that are readily convertible into each with negligible risk of change in its value.

Cash Basis of Accounting: Recording of income and expenses on receipt and payment basis on irrespective of the period on which they are actually accrued.

Cash Discount: Is an incentive provided by the seller on invoiced price for settling the payment due within the stipulated time. It is inrorm of deduction in invoiced price.

Cash Profit: Net cash receipt after reducing all cash expenses.

Net Profit Add: Depreciation

Add: Amortised expenses/Non cash expenses cash profit Carrying Amount: Cost of Asset Less: Accumulated Depreciation.

Change: Is a mortgage or claim on asset done by the lenders for securing the amount of debt. These are of two types:

Fixed charge: Charge against a specific property.

Floating Charge: on company assets as a whole which may crystillise in particular circumstances.

Collateral Security: Is the security other than the principal security offered additionally by borrower to secure a loan.

Cost of Disposal: Incremental expenses directly attributable to disposal of asset.

Contingent Asset: Is a possible asset by arising out of uncertain future events beyond the control of the entity.

Contingent Liability: Is a potential liability depending on an uncertain future events or any existing condition which can be reasonable estimated.

Cost of purchase = Purchase price + Freight inwards + expenses incurred (-) Discount/Rebate

Cost of Goods Sold = Opening Stock + Purchases – Closing Stock Conversion Cost: Cost directly attributable for conversion of raw material into semifinished/finished goods.

Conversion Cost = Direct labour cost + Manufacturing overheads Convertible Debenture: Debenture having right to be converted wholly or partly into the shares of the company.

Cumulative Preference Shares: A type of preference shares where unpaid dividend accumulates against the profit of enterprise and are paid in priority to equity shareholders. Unless specified, preference shares are deemed to be cumulative.

Current Asset: Business assets kept for short-term for the purpose of converting them into cash or for resale in the ordinary course of business- Example Inventory, Debtors, Bank balance, etc.

Current Liability: Liabilities payable in near future (usually within an year). Example-Creditors, Bank overdraft etc.

Depletion: Reduction through periodic write offs, of cost of wasting asset. Depreciation: Is the fall in value of depreciable fixed assets as a result of normal wear and fear, obsolescence or accident. It is usually spread over the useful life of the asset.

Depreciable amount = Historical value (-), salvage value if any Depreciable Asset: Asset that provides economic benefits for more than one accounting period but how a limited life and not held for sale in ordinary course of business.

Example: Plants Machinery, furniture, etc.

Discount: Is a concession in price offered for enabling prompt payment. Dividend: Distributable profits or reserves of company paid to shareholders. Equity Share: Are the ordinary shares carrying voting rights eligible for receiving dividend after, the payment of dividend on preference shares. Exchange difference: Difference resulting from conversion of one units in one of currency to another currency are different exchange rates. Expense: Reduction in economic benefits as a result of outflows during an accounting period. It is the cost of carrying business operations.

Extraordinary Items: Income and expenses arising out of infrequent or unusual activities other than those carried in the ordinary course of business. Expired cost such portions of cost whose benefit is exhausted at the reporting date.

Fair Value: Exchange price estimated to be received on sale of asset or settlement of liability between willing parties when there is no compulsion on both the parties to buy or sell and both have knowledge about all relevant facts.

Fair Market Value: Exchange price estimated to be received on sale of asset or settlement of liability in an open market when there is no compulsion on both the parties to buy or sell and both have knowledge about all relevant facts.

First Charge: Is a charge on the assets of the principal loan in priority 0’/~ r other charges on that particular asset.

Fixed Assets: Business assets purchased for smooth operation of business activities and not held for resale in ordinary course of business.

Example: Plants, Machinery, Land & Building etc.

Fixed Cost: Production cost fixed in nature in short run and is not affected from change in volume of production. For example – Rent of building, insurance premium, etc.

Financial Instrument: Monetary contracts between the parties that creates financial asset for one enterprise and correspondingly financial liability for another enterprise.

Forfeited Shares: Shares taken back on failure of payment due on calls from shareholders by the directors if authorised by articles of association, the shareholders loses the title on such shares.

Free reserves: Reserves which can be utilised in any manner without any restriction.

Gain: Increase in owner’s equity as a result of transaction arising out of other than normal business operations.

General Reserve: Revenues reserve setup for meeting potential future unknown liabilities of the business.

Goodwill: Intangible business asset recorded under Non-current Assets which arises due to reputation, trade name or business connection of the enterprise. ,✓

Gross Profit/Gross margin: Difference between total sales revenue earned from sale of goods or rendering of services and the direct cost related to such goods or services.

Gross Profit = Net Sales – Cost of goods

Government Grants: Assistance provided in cash or kind by the government to the business enterprise that requires compliance of certain conditions relating to operations of the business.

Gross Book Value: Is the historical cost of fixed assets as recorded in books of accounts and financial statements of the business.

Income & Expenditure Statement: Financial statement of Non-Profit making enterprises prepared to records the income and expenses of the relevant accounting period.

Intangible Asset: Is the asset which cannot be touched i.e. it does not have any physical identity and can only be felt. For example – Goodwill of the business, trademarks, patents, copy rights, etc.

Inventory/stock : Is a tangible asset

  • held for the purpose of sale in the ordinary course of business or
  • are in the process of production of such saleable goods or rendering of services (i.e. raw material or work in progress)
  • one used for production of goods and rendering of services (example – stores, spares, etc.)

Investments: Assets held by business enterprise for earning income in the form or dividends, rentals, etc. for future capital appreciation.

Issued Shares Capital: Is the portion of authorised share capital which has been offered for subscription.

Joint Venture: Is a contract executed between two or more parties to undertake an economic activity which is under the control of both the parties. Liability: Amount that business owes to outsiders (creditors).

Liability = Asset – Capital

Lien: Is a right to hold or retain the possession of assets or property of a [i.e. a security interest] on assets of debtors by the creditor for the sum payable by former to rather.

Long term Liability/Non-Current Liabilities: Liability whose payment may fall due after twelve months.

Lease: Formal agreement to use the assets for a specified period on payment of lease rentals.

Mortgage: When a loan is advanced in return of immovable property to be treated as security for loan, the property is said to the mortgaged.

Security is redeemed only after repayment of such loan.

Net Assets/Net Worth/Shareholders Wealth = Paid up Share Capital + Reserves Surplus


Total Assets – Liabilities [except fictitious assets]

Net Profit: Difference between total sales revenue including other income and all the cost (whether direct or indirect cost)

Net Profit = Sales Revenue + Other Income (-) Cost of Goods sold (-) Indirect expenses

Net Realisable Value/Net Selling Price: Expected sales price minus cost to complete the sale

Obsolescence: Process of becoming outdated due to change in technology, production methods, etc. and hence no longer used.

Operating Profit: Profit of the business before reducing interest and tax related expenditure.

Paid-up Share Capital: Is the portion of issued subscribed share capital for which the amount due on shares has been received by the company including bonus shares issued if any.

Preference Shares: Are the type of shares having preferential right in relation to payment of dividends at fixed rates periodically and repayment of capital and the time of redemption along with participating rights in surplus profits if any.

Preliminary Expenses: Expenses incurred in formation of company. Example: Expenses in issue of prospectus, preparation of memorandum of Association and Articles of Association.

Prepaid expenses: Expenses paid in advance, i.e. before the period in which they are actually incurred.

Prime Cost: Direct material + Direct Wages + Direct Expenses.

Prior Period Items: Income and expenses which arise in current period as a result of errors or omission in preparation of financial statement of one or more prior periods.

Profit & Loss A/c: It shows financial of the concern. It is a financial statement showing revenue earned and expenses incurred during an accounting period .by the business enterprise.

Revenue > Expenses = Profit Revenue < Expenses = Loss

Prudence: Care and caution that someone shows while making decisions related to recording of financial transactions soar to give true and correct disclosures. It is because of prudence concept, that profits one not anticipated while all known liabilities and losses are provided for in financial statements.

Provisions: Amount retained and set aside by way of providing for any known liability the amount of which may not be ascertainable with reasonable accuracy.

Redeemable Preference Shares: Type of preference shares which are repayable after a fixed period of time.

Redemption: Discharge of liability on account of repayment of preference shares or debentures issued by the company.

Reserve: Are the portion of earning/profits of the business set-a-side for general or specific purpose other than provisions.

Revaluation Reserve: reserved created on account of change in estimated replacement cost or market price over the took value of assets.

Residual Value: Salvage value of the asset at the end of useful life after reducing expenses related to cost of disposal.

Revenue: Gross inflow of cash and receivable on account of sale of goods, supply of services or any other income such as interest, dividends, refunds, etc.

Revenue Reserve: Reserves which are not capital reserves and is used to strengthen the financial position of business, distribution of dividends to shareholders, replacement of assets, etc.

Right Shares: Shares offered for atonement to existing shareholders in proportion to their existing shareholding at the time of making fresh issue by the company.

Sales Turnover: Total sales or revenue of total services rendered by the enterprise.

Secured Loan: Loan against security where security comprise of business. Shareholder’s Equity: Difference between total assets and total liabilities of the business also called stockholders equity or networth.

Share Issue Expenses: Expenses incurred by the business enterprise in relation to issue and allotment of charges.

For example: Governmental fee, Professional charges, Cost of printing of prospectus, brokerage, commission, etc.

Share Warrants: Financial instrument that gives the right to its holders to acquire equity shares for the enterprise.

Security Premium: Difference between the issue price and face value of shares.

Subscribed Share Capital: is a portion of issued share capital for which subscription has been made and shares are allotted including bonus shares issued if any.

Sundry Creditors/Trade Creditors/Trade Payables: Amount owed by the enterprise on account of credit purchases from palsies.

Sundry Debtors/Trade Debtors/Trade Receivable: Amount receivable by the company on account of credit sales made to parties.

Trade Discount: Reduction from list price offered by supplier to promote instant payment of amount due on such supplies. It does not form part of accounting entries as the discount is deducted in the invoice and net amount is recorded in books.

Unexpired Cost: Such portion of cost whose benefit is not exhausted at the reporting date.

Unissued Share Capital: Part of authorised share capital which has not been issued/offered for subscription.

Unpaid Dividend: Dividend declared but not paid to shareholders.

Useful Life: In respect of fixed asset, it is the estimated life for which a depreciable asset could be used by the enterprise or number of units expected to be produced from the use of particular asset in the entire life span of such asset.

Short Practice Questions

  1. Define following terms:

(a) Charge

(b) Cumulative preference shares

(c) Fixed assets

(d) Inventory

(e) Preliminary expenses

(f) Contingent asset

  1. Differentiate between the following:

(a) Authorised share capital and subscribed share capital

(b) Fixed assets and Current assets

(c) Capital reserve and Revenue reserve

(d) Preliminary expenses and Prior period expenses

Past Year Questions and Answers

Objective Questions

1994 – Nov [5] State with reasons whether the following statement is true or false-

(8) Profit and Loss Account shows the financial position of the concern.

(2 marks)


False: Profit and Loss Account shows the financial results of a concern for a particular period of time. The financial position of a concern is reflected in the balance sheet.

1996 – May [5] State with reasons whether the following statement is true or false:

(5) Goodwill is not a fictitious asset. (2 marks)


True: Goodwill is an intangible asset.

1997 – Nov [5] State with reasons whether the following statement is true or false:

(5) Profit and Loss Account shows the financial position of the concern.

(2 marks)


False: Profit and Loss Account shows the financial results of a concern for a particular period of time. The financial position of a concern is reflected in the balance sheet.

1998 – May [5] State with reasons whether the following statement is true or false:

(3) Goodwill is a current asset. (2 marks)


False: Goodwill is an intangible asset and is classified as fixed asset.

2001 – Nov [5] State with reasons whether the following statement is true or false:

(iv) Goodwill is a fictitious asset. (2 marks)


False: Goodwill is an intangible asset and not fictitious.

2004 – May [5] State with reasons whether the following statement is true or false:

(x) Depreciable amount refers to the difference between historical cost and the market value of an asset. (2 marks)


False: Depreciable amount refers to historical cost less salvage value.

Short Notes

1995 – Nov [6] Write Short Note on the following:

(1) Trade Discount.


Trade Discount:

This is a discount given by a manufacturer or wholesale dealer to dealer or retail dealer. This is deducted from the sale price in the invoice itself. The retail dealer is required to sell the goods at a fixed price (catalogue price) and hence this practice is followed. It does not form part of accounting entries as the discount is deducted in the invoice and net amount is entered in books of account.

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