Q.

1 Define Accounting Standards and discuss important

features of AS-I, AS-9, AS-14, AS-20.
Ans.: Accounting Standard: Accounting standards are the policy
documents issued by the recognized expert accountancy body relating
to various aspects of measurements, treatment and disclosure of
accounting transactions and events.
AS-I : Disclosure of Accounting Policies : The standard issued by
Accounting standard Board (ASB) deals with the disclosure of
significant accounting policies followed in preparing and presenting
financial statements. Such disclosure would facilitate a meaningful
comparison between financial statements of different enterprise.
Following points are considered in this disclosure:
Going concern, consistency and accrual have been generally
accepted as fundamental accounting assumptions.
The accounting policies refer to the specific accounting principles and
the methods of applying those principles adopted by the enterprise in
the preparation and presentation of financial statements.
The areas in which different accounting policies may be adopted are :_ Methods of depreciation, depletion and amortization. Valuation of
Inventories, Investments, Goodwill, fixed assets.
_ Treatment of Contingent liabilities, retirement benefits.
The basis for the selection of accounting policies is that they should
represent a true and fair view of the state of affairs of the enterprise.
Prudence, Substance over form and Materiality are the major
consideration governing the selection of accounting policies.
Any change in an accounting policy which has a material effect should
be disclosed and the significant accounting policies should normally be
disclosed in one place.
AS-9: Revenue Recognition: Revenue recognition is mainly
concerned with the timing of recognition of revenue in the statement of
profit and loss of an enterprise. The amount of revenue arising on a
transaction is usually determined by agreement between the parties
involved in the transaction. The statement is Fore more detail:concerned with the bases for recognition of revenue in the statement
of profit and loss account of an enterprise.
The statement is concerned with the recognition of revenue arising in
the course of the ordinary activities of the enterprise from:The sale of goods;
The rendering of services; and
The use by others of enterprise resources yielding interest, royalty
and divided.
Sale of Goods : A key criterion for determine when to recognize
revenue from a transaction involving the sale of goods is that the seller
has transferred the property in the goods to the buyer for a
consideration. The transfer of property in goods, in most cases, results
in or coincides with the transfer of significant risk and rewards of
ownership to the buyer.
Rendering of Services: Revenue from service transaction is usually
recognized as the services is performed, either by the proportionate
completion method or by the completed service method

(i) Proportionate completion method: - Performance consists of the

execution of more than one act. Revenue is recognized under this
method would be determined on the basis of contract value, associated
costs, number of acts or other suitable basis.
(ii) Completed service method: - Performance consists of the execution
of a single act. Revenue is recognized when the sale of final act takes
place. The use by others of Enterprise Resources Yielding
interest, Royalties and Dividends.
(i) Interest accrues (for the use of cash resources) is recognized on the
time basis determined by the amount outstanding.
(ii) Royalties accrue (for the use of know how, patents, trade marks) in
accordance with the terms of relevant agreement.
(iii) Dividends rewards (from the holding of investment in shares) is
recognized when a right to receive payment is established.
Recognition of revenue requires that revenue is measurable and that at
the time of sale of goods, or the rendering of services it would not be
unreasonable to expect ultimate collection.
AS-14 : Accounting for Amalgamations (Come into effect from
1-4-1995): This Statement deals with accounting for amalgamations
and the treatment of any resultant goodwill or reserves. This statement
is directed principally to Fore more companies although some of its
requirements also apply to financial statement of other enterprise. The
following terms are used in this statement with the meaning
specified :(i) Amalgamation means an amalgamation present to the provision of
the companies act 1956 or any other statute which may be applicable
to companies.
(ii) Transferor Company means the company which is amalgamated
into another company.
(iii) Transferee Company into which a transferor company is
amalgamated. An Amalgamation may be either:
(a) in the nature of merger, or (b) in the nature of purchase.
In case of an amalgamation in the nature of merger following
conditions should be satisfied:(i) All assets and liabilities will be the assets and liabilities of
Transferee Company.
(ii) Share holders holding not less than 90% of the face value of the
equity shares of the transferor company will be the shareholder of
Transferee Company.
(iii) Payment will be made in equity shares to the equity share holders
except cash may be paid in respect of any fractional shares.
(iv) Business of the transferor company will be continued by the
Transferee Company.
(v) Book values will be same in the books of Transferee Company. When
any one or more above conditions are not satisfied, an amalgamation
should be considered to be an amalgamation in the nature of purchase.
For an amalgamation in the nature of merger, pooling of interest
method is applied and for an amalgamation in the nature of purchase
purchase method is applied.
AS-20: Earning Per Share (Come into effect from 1-4-2001) : It is
mandatory in nature, from that date, in respect of enterprise whose

equity shares are listed on a recognized stock exchange in India. The

objective of this statement is to prescribe principles for the
determination and presentation of earning per share which will improve
comparison of performance among different enterprises for the same
period and among different accounting periods for the same enterprise.
An enterprise should present basic and diluted earnings per share on
the face of the statement of profit and loss for each class of equity
shares that has a different right to share in the net profit for the period.
(A) Basic Earning per Share: Basic earnings per share should be
calculated by dividing the net profit or loss (after deducting preference
dividend and any attributable tax there to) for the period, attributable
to equity share holder by the weighted average number of equity
shares outstanding during the period.
(B) Fair Value per Share: Fair value per share is calculated by adding
the aggregate fair value of the shares immediately prior to the exercise
of the rights to the proceeds from the exercise of the rights, and
dividing by the number of shares outstanding after the exercise of the
rights.
(C) Diluted Earning per Share: For the purpose of calculating diluted
earning per share, the net profit or loss for the period attributable to
equity share holders and the weighted average number of shares
outstanding during the period should be adjusted for the effects of all
dilutive potential equity shares.
Q.1. What is meant by Accounting? Give two objectives of Accounting.
Ans. According to the American Institute of Certified Public Accountants (AICPA) in
their Accounting Terminology Bulletin No. 1, Accounting is the art of recording,
classifying and summarizing in a significant manner and in terms of money, transactions
and events which are, in part at least, of a financial character and interpreting the results
thereof.
Two objectives of Accounting are:
(i) To keep systematic records: Its main objective is to keep complete record of business
transactions. It avoids the possibility of omission and fraud.
(ii) To calculate profit or loss: Accounting helps to ascertain the net profit earned or loss
suffered on account of business transactions during a particular period. To ascertain profit
or loss at the end of each accounting period Trading and Profits & Loss of the business is
prepared.
Q.2. What do you mean by Accounting Concepts?
Ans. Accounting Concepts provide a base for accounting process every enterprise has to
consider basic concepts at the time of preparing its financial statements. According to
Kohler concept as, A series of assumptions constituting the supposed basis of a system
of thought or an organized field of an endeavour.
Q.3. What is separate entity concept?
Ans. According to this concept, the business and businessman are two separate and
distinct entities.Business is treated as a unit separate and distinct from its owners,
managers and others. Therefore,proprietor is treated as a creditor of the business to the
extent of capital invested by him in the business. It is applicable to all forms of business
organizations, i.e., sole proprietorship, partnership or a company.
Q.4. What do you understand by going concern concept?
Ans. According to this concept it is assumed that the business will continue to exist for a
long period in the future. According to this concept we record fixed assets at their original
cost and full cost of the asset would not be treated an expense in the year of its purchase
itself.

Q.5. What do you understand by convention of consistency?

Ans. According to this convention accounting principles and methods should remain
consistent from one year to another. The rationale for this concept is that changes in
accounting treatment would make the Profit & Loss and Balance Sheet unreliable for end
users. For example there are several methods of providing depreciation on fixed assets i.e.
fixed installment method, diminishing balance method etc., But it is expected that the
business entity should be consistent to follow accounting method.
Q.6. Explain Accounting Equation.
Ans. Accounting equation is also termed as balance sheet equation. It signified that the
assets of a business are always equal to the total of capital and liabilities.
It

can

be
Assets
=
Capital = Assets + Liabilities

represented
Liabilities

as:
Capital

Short: Question-Answer
Q.1. Give advantages of Accounting.
Ans. Advantages of accounting are:
(i) Provides Complete and Systematic Record: In business there are so many transactions
therefore it is not possible to remember all transactions. Accounting keeps a systematic
record of all the business transactions and summarized into financial statements.
(ii) Information Regarding Financial Position: Accounting provides information about the
financial position of the business by preparing a balance sheet at the end of each
accounting period.
(iii) Helpful in Assessment of Tax Liability: Accounting helps in maintaining proper
records. With the help of these records a firm can assessed income tax of sales tax. Such
records are trusted by income tax and sales tax authorities.
(iv) Information Regarding Profit or Loss: Profit & Loss Account is prepared at the end of
each accounting period to know the net profit earned or net loss suffered at the end of
each accounting period.
Q.2. Give limitations of Accounting.
Ans. Limitations of Accounting are:
(i) Possibilities of Manipulation: Accounts can be manipulated, so that the financial
statements may disclose a more favourable position then the actual position for example
closing stock may be overvalued in accounts.
(ii) It includes only Economic Activities: Non-monetary transactions are not recorded in
accounts. Transactions which can not be expressed in money cannot find place in
accounts. Qualitative aspects of business units like management abour relations,
efficiency of management etc. are wholly omitted from the books of accounts.
(iii) Price Level Changes not Considered: Fixed assets are recorded in accounts at their
original cost. Sometimes assets remain undervalued particularly land and building. Effect
of price level changes is not considered at the time of preparing accounts.
(iv) Influenced by Personal Judgments: An accountant has to use his personal judgment in
respect of many items. For example, it is very difficult to predict the useful life of an
asset.
Q.1 Define Accounting. What is GAAP (Generally accepted
Accounting Principles)? Explain briefly the Accounting
Principles.
Ans Accounting may be defined as the process of recording,
classifying, summarizing and interpreting the financial transactions and
communicating the results there of to the persons interested in such
information. GAAP (Generally Accepted Accounting Principles): It
is a Technical concept that describes the basic rules, concepts,

conventions and procedures that represent accepted accounting

practices at a particular time. Accounting principles can be divided into
two parts:
1.Principle
2. Concepts & Conventions
The term concept includes thosebasic assumptions, conditions and
ideas upon which the science of accounting is based. Conventions used
to signify the customs or traditions as a guide to the preparation of
accounting statements.
Accounting Concepts :
(1) Entity Concept: According to this concept business is treated as a
separate unit and distinct from its proprietors.
(2) Dual Aspect Concept: According to this concept every transaction
has two sides at least. If one account is debited, any other account
must be credited. Every business transaction involves duality of
effects. (i) Yielding of that benefit (ii) The giving of that benefit.
(3) Going Concern Concept: This concept assumes that the business
will continue to exist for a long period in the future. There is neither the
necessity nor the intention to liquidate it.
(4) Accounting Period Concept: According to this concept the entire
life of the concern is divided in time intervals for the measurement of
profit at frequent intervals.
(5) Money Measurement Concept: Only those transactions and
events are recorded in accounting which is capable of being expressed
in terms of money.
(6) Cost Concept : According to this concept:
(a) An asset is ordinarily entered in the accounting records at the
price paid to acquire it.
(b) This cost is the basis for all the subsequent accounting for the
asset.
(7) Matching Concept: In determining the net profit from business
operations all cost which is applicable to revenue of the period should
be charged against that revenue.
(8) Accrual Concept: This concept helps in relating the expenses to
revenue for a given accounting period.
(9) Realization Concept: According to this concept, revenue is
recognized when sale is made and sale is considered to be made when
a goods passes to the buyer and he becomes legally liable to pay for it.
(10) Verifiable objectivity Concept: This concept means that all
accounting transactions that are recorded in the books of accounts
should be evidenced and supported by business documents.
Conventions: Accounting conventions are of following types:(1) Convention of Disclosure: According to this convention
accounting reports should disclose fully and fairly the information they
purport to represent. The information which are of material interest to
proprietors.
(2) Convention of Materiality: The accountant should attach
importance to material details and ignore insignificant details.
(3) Convention of Consistency: This convention describes that
accounting principles and methods should remain consistent in order to
enable the management to compare the results of the two periods.
These principles should not be changed year after year.

(4) Convention of Conservatism: According to this convention, in the

books of accounts all anticipated losses should be recorded and all
anticipated gains should be ignored.
I. BANK BALANCE SHEETS
Balance sheets are the standard accounting tool for listing a bank's assets and liabilities,
which is all that a bank's balance sheet is. Drawing one up is fairly simple:
-- Step one: Draw a big lower-case "t."
-- Assets (how the bank uses its funds) go on the left side.
-- Liabilities (sources of funds, or how the bank gets its funds) go on the right side.
You may have seen a similar table in introductory macro. The numbers in parentheses
are the proportions of the total.
ASSETS
LIABILITIES + BANK CAPITAL
Reserves (cash on hand or stored with Fed) DEPOSITS (checking 5% + savings & CDs
(1%)
56% = 61%)
Cash items in the process of collection (2%)

Borrowings (loans from other banks and

nonbanks) (21%)

Securities (government and other bonds,

mortgage-backed securities) (23%)

Other liabilities (including borrowings from

foreign sources) (8%)

LOANS to firms, individuals, etc. (65%)

Other assets (9%)

Bank capital ( = Total assets - Total

liabilities) (10%)

------------------------------------------------------ -------------------------------------------------------TOTAL ASSETS (100%; $11.2 trillion in

March 2008)

TOTAL LIABILITIES + BANK CAPITAL

(100%; $11.2 T)

For the balance sheet to "balance," the two sides must add up to the same amount.
However, a healthy bank will not have equal amounts of assets and liabilities, but will
instead have more assets than liabilities.
Assets - Liabilities = Bank capital (or Net worth)
What we do to make the two sides equal is to add Bank capital to the Liabilities side.
(Note that it now bears the heading "Liabilities + Bank Capital." Bank capital could be
either equity (shares of stock in the bank) or retained earnings.
We normally list the most liquid items first. (The general rule is to list items in
descending order of liquidity.)
On the asset side, then, the first item on a bank's balance sheet is reserves, which banks
keep to meet deposit outflows (withdrawals, checks drawn on the bank, etc.) and because
they're
required
to
do
so
by
the
Fed.
-- Banks are required by the Fed to hold a certain proportion of their deposits as reserves,
mainly to guard against "runs on the bank" and to allow the Fed to manipulate the money
supply. Reserves can be held either as cash or in accounts at the Fed. Currently, the
required reserve ratio (RRR) is 10% on checking accounts and zero on savings and
money-market accounts.
The difference between a bank's total reserves and its required reserves is its excess
reserves:
excess reserves (ER) = actual reserves - required reserves
= actual reserves - (.10)(checking deposits)
Excess reserves are mainly kept by banks as a precaution. In good times, banks generally
try to keep as few excess reserves as possible, since they earn no interest on them. The
Fed's reserve requirements are typically much higher than what banks actually need in

order to be able to handle deposit outflows.

II. T-ACCOUNTS
... are a modified form of balance sheets, useful for examining how a bank reacts to
changes. Instead of laboriously listing all of the bank's assets and liabilities, T-accounts
list only the changes in the bank's assets and liabilities.
For example, suppose I won the NCAA basketball pool and get paid with a check for
$100, drawn on Prof. Spizman's account at the Key Bank, and deposit it into my checking
account at Pathfinder Bank. The initial change, before the check clears, to my bank's
balance sheet will be as follows:
Pathfinder
Bank,
BEFORE
Check
Clears
ASSETS (A)

LIABILITIES (L)

Cash items in the process of collection + $100

Checking deposits + $100
At Key Bank, before the check clears there is no change on Key's balance sheet, because
Key has no way of knowing that someone has written a check on a Key account. They
don't find out about that until the check has gone to the New York Fed to be cleared.
After the check clears, the change in Pathfinder Bank's balance sheet is just a bit different,
and Key's balance sheet will be a lot different:
Pathfinder
Bank,
AFTER
Check
Clears
ASSETS (A)

LIABILITIES (L)

Reserves at Fed + $100

Checking deposits + $100

If the reserve requirement is 10%, the bank has an increase in excess reserves of --?
(Change in) excess reserves = total reserves - required reserves
= $100 - (10%)($100)
= $100 - $10 = $90
It will probably loan out those excess reserves, so as to earn interest on them.
Key
Bank,
AFTER
check
clears
ASSETS (A)

LIABILITIES (L)

Reserves at Fed - $100

Checking deposits - $100
The change in Key's excess reserves is negative, since only $10 had to be held as reserves
against those $100 in checking deposits yet $100 cash is now gone. So if the bank had
zero excess reserves before, it would now have excess reserves of -$90 (= -$100 -(-$10)),
or a reserve deficiency of $90. To obtain that $90, the bank would have to borrow some
funds from the Fed or another bank, borrow from a corporation (repo), sell off some of its
assets (e.g., T-bills), issue commercial paper, or call in some of its loans. Of those options,
calling in some of its loans (usually accomplished by simply not renewing short-term
loans) is the one the bank likes least, because its loans are its most profitable business -- a
bank, after all, makes a profit by obtaining funds at a relatively low interest rate (zero on
basic checking accounts) and loaning them out at much higher interest rates . Also, the
customer whose loan is called in will have to take his business elsewhere, and might do
so permanently; since banks hate to lose good customers, they generally avoid calling in
loans early.
III. AREAS OF BANK MANAGEMENT
Going down a typical balance sheet, we can note four different areas of primary concern
to a profit-maximizing, risk-averse bank management team. A bank's managers have to
keep track of four different primary areas:

(1) LIQUIDITY MANAGEMENT: make sure the bank has just enough cash
reserves and liquid assets to meet (net) deposit outflows and its reserve requirements at
the
Fed.
-- Here we see the usual risk-return relationship. Reserves don't pay interest, so keeping
too much in the way of reserves reduces the bank's overall profitability. But holding just
the bare minimum of reserves exposes the bank to liquidity risk, i.e., the risk of failing to
meet its Fed reserve requirements or being unable to meet an unexpectedly large deposit
outflow.
(2) ASSET MANAGEMENT: acquire assets (loans, securities) with acceptably low
risk and high return.
-- Several types of risk come into play here.
---- First, there is credit risk, or default risk -- the possibility that some of the loans owed
to the bank won't be repaid, or that some of its bonds and other securities might default.
---- Bank loans and bond holdings are also subject to interest-rate risk -- the possibility
that market interest rates might go up, causing the bank's fixed-rate loans to lose value.
------ Because interest-rate risk is particularly severe on household mortgages, which
typically have a length of 30 years, banks tend to sell their mortgages off as quickly as
possible, to government agencies like the Federal National Mortgage Association (which
buy them up and repackage them as securities to sell to the public).
---- (In addition, especially for banks that are active in financial derivatives markets, there
is trading risk, or market risk, if, say, a derivatives contract ends up obliging the bank to
sell a financial instrument for less than it paid for it.)
-- As with household investors, banks can reduce some of their risk through
diversification, e.g., by making different kinds of loans and holding securities of varying
maturity lengths.
(3) LIABILITY MANAGEMENT: acquire funds (deposits, borrowings) at low cost
-- A good combined yardstick of asset and liability management together is the bank's
interest-rate spread: the difference between the average interest rate at which the bank
loans (earns) money and the interest rate at which the bank borrows (pays) money.
-- Interest-rate risk comes into play here as well. Higher interest rates can deal a bank a
double-blow -- the PDV of the bank's long-term fixed-rate loans and bonds takes a
beating, while the bank has to pay higher interest rates to its depositors in order to be
competitive.
(4) CAPITAL ADEQUACY MANAGEMENT: decide how much capital (net worth)
the bank should have and acquire it
-- Capital adequacy management is similar to liquidity management. Just as a bank may
hold excess reserves to guard against unexpected deposit outflows, it needs to have a
decent cushion of funds -- specifically, a large enough excess of assets compared with its
liabilities -- to protect it from an unexpected drop in the value of its assets, since virtually
all of its loans carry at least some risk of default.
---- A bank with negative bank capital is insolvent.
-- Banks are required by federal authorities to meet certain minimum capital
requirements. The level of bank capital can be either too high or too low: too much bank
capital dilutes the shareholders' equity, thus reducing their returns (i.e., their return on
equity), whereas too little puts the bank at risk of insolvency.
-- In the economic crisis of 2008-2009, bank capital is absolutely crucial, because many
banks appear to be insolvent, especially those that had large quanitities of mortgagebacked securities among their assets. Those securities have lost much of their value, so
probably a good many banks that held them are now insolvent. But virtually nobody
knows the exact value of those securities, as there's not much of a market for them at
present (winter 2009) -- hedge funds and various bargain hunters are willing to buy them
at rock-bottom prices, but banks would rather hold onto them than sell them for so little.

So depending on how one calculates the values of those mortgage-backed securities, a

particular bank might still be solvent or it might not.
A simple way to memorize the four areas of bank management: just remember the
acronym
"LALC"
-- for Liquidity management, Asset management, Liability management, and Capital
adequacy management.
Q: A bank sells a 1-year CD for $100,000, at an interest rate of 3%. It uses the proceeds
to buy $100,000 worth of 10-year Treasury bonds paying 6%. What would happen if all
interest rates rose by 2 percentage points the next day? (What kind of risk has the bank
exposed itself to?)
A: The PDV (and hence the balance-sheet value) of those long-term bonds would drop
sharply if market interest rates rose by 2%. This would lower the value of the bank's
assets. On the liabilities side, the PDV of the 1-year CD would drop, too, but not by as
much, because the PDV's of short-term interest-bearing assets are less affected by interestrate changes than are the PDV's of long-term bonds. (In other words, long-term assets
have more interest-rate risk than short-term assets.) The value of the bank's assets would
decline more than the value of the bank's liabilities, which is bad news for the bank.

Short Notes:
Accrual Basis Accounting:
Under the Accrual basis accounting system transactions those changes a
company's financial statements are recorded in the periods in which the
events occur.
Cash Basis Accounting:
Under the Cash basis accounting revenue is recorded when cash is received
and a expense is recorded when cash is paid.
Work Sheet:
A work sheet is a multiple column form that may be used in the adjustment
process and in preparing financial statements.
Website: http://banking-diploma.blogspot.com/
Important short notes of ACCOUNTING:
Cost Volume Profit Analysis
Cost-Volume-Profit (CVP) analysis is a managerial accounting technique that is
concerned with the
effect of sales volume and product costs on operating profit of a business. It
deals with how
operating profit is affected by changes in variable costs, fixed costs, selling
price per unit and the
sales mix of two or more different products.
Assumptions
CVP assumes the following:
Sales price per unit is constant.
Variable costs per unit are constant.
Total fixed costs are constant.
Everything produced is sold.
Costs are only affected because activity changes.
If a company sells more than one product, they are sold in the same mix.
CVP Analysis Formula
The basic formula used in CVP Analysis is derived from profit equation:
px = vx + FC + Profit

In the above formula,

p is price per unit;
v is variable cost per unit;
x are total number of units produced and sold; and
FC is total fixed cost
Besides the above formula, CVP analysis also makes use of following
concepts:
Contribution Margin (CM)
Contribution Margin (CM) is equal to the difference between total sales (S)
and total variable cost
or, in other words, it is the amount by which sales exceed total variable costs
(VC). In order to
make profit the contribution margin of a business must exceed its total fixed
costs. In short:
CM = S VC
Unit Contribution Margin (Unit CM)
Contribution Margin can also be calculated per unit which is called Unit
Contribution Margin. It is
the excess of sales price per unit (p) over variable cost per unit (v). Thus:
Unit CM = p v
mportant short notes of ACCOUNTING:
Asset
In financial accounting, assets are economic resources. Anything tangible or
intangible that is
capable of being owned or controlled to produce value and that is held to
have positive economic
value is considered an asset. Simply stated, assets represent ownership of
value that can be
converted into cash (although cash itself is also considered an asset).
Current assets
Current assets are cash and other assets expected to be converted to cash,
sold, or consumed either
in a year or in the operating cycle (whichever is longer), without disturbing
the normal operations
of a business. These assets are continually turned over in the course of a
business during normal
business activity. There are 5 major items included into current assets:
1. Cash and cash equivalents it is the most liquid asset, which includes
currency, deposit
accounts, and negotiable instruments (e.g., money orders, cheque, bank
drafts).
2. Short-term investments include securities bought and held for sale in the
near future to
generate income on short-term price differences (trading securities).
3. Receivables usually reported as net of allowance for uncollectable
accounts.
4. Inventory trading these assets is a normal business of a company. The
inventory value
reported on the balance sheet is usually the historical cost or fair market

value, whichever is
lower. This is known as the "lower of cost or market" rule.
5. Prepaid expenses these are expenses paid in cash and recorded as
assets before they are
used or consumed (a common example is insurance).

Fixed assets
Also referred to as PPE (property, plant, and equipment), these are purchased
for continued and
long-term use in earning profit in a business. This group includes as an asset
land, buildings,
machinery, furniture, tools, and certain wasting resources e.g., timberland
and minerals. They are
written off against profits over their anticipated life by charging depreciation
expenses (with
exception of land assets). Accumulated depreciation is shown in the face of
the balance sheet or in
the notes.
These are also called capital assets in management accounting.

Intangible asset
Intangible assets are defined as identifiable non-monetary assets that cannot
be seen, touched or
physically measured, which are created through time and/or effort and that
are identifiable as a
separate asset. There are two primary forms of intangibles - legal intangibles
(such as trade secrets
(e.g., customer lists), copyrights, patents, and trademarks) and competitive
intangibles (such as
knowledge activities (know-how, knowledge), collaboration activities,
leverage activities, and
structural activities). Legal intangibles are known under the generic term
intellectual property and
generate legal property rights defensible in a court of law. Competitive
intangibles, whilst legally
non-ownable, directly impact effectiveness, productivity, wastage, and
opportunity costs within an
organization - and therefore costs, revenues, customer service, satisfaction,
market value, and share
price. Human capital is the primary source of competitive intangibles for
organizations today.
Competitive intangibles are the source from which competitive advantage
flows, or is destroyed.
The area of finance that deals with intangible assets is known as Intangible
Asset Finance.
Important short notes of ACCOUNTING:
Off Balance Sheet Items

Off balance sheet items are those assets or liabilities which do not appear on
the balance sheet of a
company and that is the reason why they are called off balance sheet items
as they are not visible in
the balance sheet of a company.
Off balance sheet items are quite controversial because many companies try
to hide the real
liabilities by showing those liabilities as off balance sheet items and thus
hiding the real financial
position of a company from the investors. Guarantees which are given by the
banks to the
company, letters of credit issued by banks to company, any expenses related
to litigation when the
company is sued by third parties for damages, contingent liabilities etc., are
some of the examples
of off balance sheet items.
Off balance sheet items are of particular significance when company is
applying for loans from the
banks as banks tend to see debt equity ratio before granting loans to a
company and if the debt
equity ratio of company is not favorable then company may show real
liabilities as off balance
sheet items which will make the debt equity ratio of company favorable and
therefore it will help
the company in taking loan from bank. It is due to this reason bank pay
particular attention to off
balance sheet items before giving loans to companies.
Direct credit substitutes in which a bank substitutes its own credit for a third
party,
including standby letters of credit
Irrevocable letters of credit that guarantee repayment of commercial paper or
tax-exempt
securities
Risk participations in bankers acceptances
Sale and repurchase agreements
Asset sales with recourse against the seller
Interest rate swaps, interest rate options and currency options
Important short notes of ACCOUNTING:
IFRS
International Financial Reporting Standards (IFRS) are principles-based
standards,
interpretations and the framework (1989)[1] adopted by the International
Accounting Standards
Board (IASB).
Many of the standards forming part of IFRS are known by the older name of
International
Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the
Board of the
International Accounting Standards Committee (IASC). On April 1, 2001, the
new IASB took over
from the IASC the responsibility for setting International Accounting
Standards. During its first

meeting the new Board adopted existing IAS and Standing Interpretations
Committee standards
(SICs). The IASB has continued to develop standards calling the new
standards IFRS.
How is Inventory Determined?
Inventory can be broken down into three categories: raw materials, work-inprocess, and finished
goods. Raw materials are inventory used to produce assets for sale. Work-inprocess is assets in
production for sale. Finished goods are assets intended for sale. The inventory
equation is the
following:
1. Beginning Inventory + Net Purchases - Cost of Goods Sold = Ending
Inventory
There are two common methods for accounting for this inventory.
LIFO - Last-In, First-Out
LIFO assumes that the last items put on the shelf are the first items sold. LIFO
is a good system to
use when your products are not perishable or become obsolete. Under LIFO,
when prices rise, the
higher priced items are sold first and the lower priced products are left in
inventory. This increases
a company's cost of goods sold and lowers their tax liability and, as a result,
their net income.
This inventory accounting method seldom approximates replacement costs
for inventory, which is
one of its drawbacks. In addition, it usually does not correspond to the actual
physical flow of
goods.
Let's use the gasoline industry as an example. Let's say that a tanker truck
delivers 2,000 gallons of
gasoline to Henry's Service Station on Monday and the price at that time is
$2.35/gallon. On
Tuesday, the price of gasoline has gone up and the tanker truck delivers
2,000 more gallons at a
price of $2.50/gallon. Under LIFO, the gasoline station would assign the $2.50
gallon gasoline to
Cost of Goods Sold and the remaining $2.35 gallons of gasoline would be
used to calculate the
value of ending inventory at the end of the accounting period.
FIFO - First-In, First-Out
FIFO assumes that the first items put on the shelf are the first items sold, so
your oldest goods are
sold first. This system is generally used by companies whose inventory is
perishable or subject to
quick obsolescence. If prices go up, FIFO will give you a lower cost of goods
sold because you are
using your older, cheaper goods first. Your bottom line will look better to your

investors, if you
have any, but your tax liability will be higher because you have higher profit.
A positive about the
FIFO method is that it represents recent purchases and, as such, more
accurately reflects
replacement costs.
Going back to the gasoline industry example, under FIFO, the gasoline station
would assign the
$2.35 gallon gasoline to Cost of Goods Sold and the remaining $2.50 gallons
of gasoline would be
used to calculate the value of ending inventory at the end of the accounting
period.

Comparability:
Comparable accounting information allows comparison between or among different
entities.
Accounting information is comparable if the same accounting principles and methods are
used by different entities. However, different entities might use the same accounting
principles (e.g., revenue recognition, matching principle, historical cost) but different
accounting methods (e.g., straight-line vs. declining-balance depreciation method, LIFO
vs. FIFO).
To ensure the comparability of accounting information, companies are required to
disclose their accounting methods (policies).
Consistency:
Consistency is related to comparability. While comparability allows a comparison
between and among different entities, consistency allows a comparison within a single
entity.
Accounting information is consistent when an entity uses the same accounting
principles and methods from one accounting period to the next: this quality allows
external users of accounting information to analyze the entity over time (e.g., analyze
trends). Nevertheless, organizations are allowed to change their accounting methods.
When a new accounting method is adopted, the organization must disclose the change in
the notes to financial statements. The change doesnt make the comparison impossible,
but it makes the analysis more difficult to perform.

The Accounting Cycle

The sequence of activities beginning with the occurrence of a transaction is
known as the accounting cycle. This process is shown in the following diagram:

Steps in The Accounting Cycle

Identify the Transaction

Identify the event as a transaction
and generate the source document.

Analyze the Transaction

Determine the transaction amount,
which accounts are affected,
and in which direction.

Journal Entries
The transaction is recorded in
the journal as a debit and a credit.

Post to Ledger
The journal entries are transferred
to the appropriate T-accounts
in the ledger.

Trial Balance
A trial balance is calculated
to verify that the sum of the debits
is equal to the sum of the credits.

Adjusting Entries
Adjusting entries are made for
accrued and deferred items.
The entries are journalized and
posted to the T-accounts
in the ledger.

Adjusted

Financial Statements
The financial statements
are prepared.

Closing Entries
Transfer the balances of the
temporary accounts
(e.g. revenues and expenses)
to owner's equity.

After-Closing
Trial Balance
A final trial balance is
calculated after the closing
entries are made.

The above diagram shows the financial statements as being prepared after the
adjusting entries and adjusted trial balance. The financial statements also can be
prepared before the adjusting entries with the help of a worksheet that calculates
the impact of the adjusting entries before they actually are posted.

The Accounting Cycle

The sequence of activities beginning with the occurrence of a transaction is
known as the accounting cycle. This process is shown in the following diagram:

Steps in The Accounting Cycle

Identify the Transaction
Identify the event as a transaction
and generate the source document.

Analyze the Transaction

Determine the transaction amount,
which accounts are affected,
and in which direction.

Journal Entries
The transaction is recorded in
the journal as a debit and a credit.

Post to Ledger
The journal entries are transferred
to the appropriate T-accounts
in the ledger.

Trial Balance
A trial balance is calculated
to verify that the sum of the debits
is equal to the sum of the credits.

Adjusting Entries
Adjusting entries are made for
accrued and deferred items.
The entries are journalized and
posted to the T-accounts
in the ledger.

Adjusted
Trial Balance
A new trial balance is calculated
after making the adjusting entries.

Financial Statements
The financial statements
are prepared.

Closing Entries
Transfer the balances of the
temporary accounts
(e.g. revenues and expenses)
to owner's equity.

After-Closing
Trial Balance
A final trial balance is
calculated after the closing
entries are made.

The above diagram shows the financial statements as being prepared after the
adjusting entries and adjusted trial balance. The financial statements also can be
prepared before the adjusting entries with the help of a worksheet that calculates
the impact of the adjusting entries before they actually are posted.