FINANACIAL ACCOUNTING

GLOSSARY
UNIT I
BRANCH ACCOUNTS
1. Branch: Any subordinate division of a business, shop, office etc.
The off shoots of the head office is known as branch.

2. Head Office: Principal place of a business or a Parent

establishment.

3. Dependent Branches: A Branch which does not maintain its own

sets of books.

4. Invoice Price: Its also known as Selling Price. It means cost plus
some percentage of profit.

5. Petty Expenses: Small expenses in the business like stationery,

repairs etc.

6. Remittances to Head Office: Its the act of sending money to head

office.

7. Cash Sales: Sales are made only on the basis of cash transactions.

8. Credit Sales: Sales are made on the basis of credit transactions.

9. Debtors Ledger: This ledger records all the transactions
relating to debtors to find out the balancing figure such as opening or
closing balances of debtors.

10. Stock Ledger: This ledger records all the transactions relating to
stock items.

11. Debtors System: Under this system branch account is opened

separately for each branch in the books of head office.

12. Shortage Of Stock:

The wastage and other abnormal losses of

goods due to normal or abnormal reasons.

13. Depreciation: Reduction in the value of fixed assets.

14. Goods In Transit: The act of passing or sending goods through
transportation.

15. Stock and Debtors System: This system maintains separate

accounts relating to various types of transactions at the branch.

16. Branch Stock a/c: It deals with goods sent, goods received and
goods returned to the head office.

17. Branch Expenses: This account is prepared to disclose branch

expenses like discount, allowances etc.

18. Branch Adjustment a/c: When accounts are charged at invoice

price this account is prepared.

19. Branch Profit or Loss a/c: This account is prepared to ascertain

the net profit made by the branch.

20. Final a/c System: The head office ascertains the profit or loss of

a dependent branch by preparing branch trading and profit and loss

accounts at cost.

21. Independent Branches: A Branch which maintains its own set of

books and has freedom to operate independently.

22. Inter-Branch Transactions: When cash or goods sent by one

branch to another or expenses incurred by one branch on behalf of
another, is known as inter-branch transactions.

23. Incorporation Of Trial Balance: The process by which the

consolidated balance sheet will be prepared is known as
incorporation of trail balance.

24. Stock Reserve: When goods are supplied at invoice price, it is

necessary to eliminate the loading or profits added and bring it to
cost level.

25. Bad Debts: The debt which cannot be recovered is known as Bad
Debts.

26. Analytical Method: Stock and debtors system is also known as

analytical method.

27. Synthetic Method: Debtors system is also known as synthetic

system.

UNIT II
DEPARTMENTAL ACCOUNTING

1.

Department: It is an independent department of an

organisation, each of which may deal in a particular class of
goods or render a specialised type of service.

2.

Departmental Accounting: The method of

accounting which is followed to obtain the trading results of each
department and the overall result of the organisation is known as
departmental accounting.

3.

Appraisal of Personnel: Individuals responsible for

improved results or declined in performance. This is useful in
implementing incentive systems.

4.

Direct Expenses: Expenses which can be directly

identified with or incurred for particular departments are called
direct expenses. Eg; Wages, Carriage inwards, insurance of stock
etc.

5.

Indirect Expenses (Common/Joint Expenses):

Expenses which cannot be identified with a particular
department, but incurred for their common benefit are called
Indirect Expenses. It is further divided to:

Expenses which cannot be apportioned.

Expenses which can be apportioned.

6. Expenses which cannot be apportioned: Expenses which have no

connection with the departments or those which have no
reasonable basis for apportionment must be shown in the
GENERAL PROFIT AND LOSS ACCOUNT. Eg; Debenture
interest, Income-tax, bank charges etc.

7. Expenses which can be apportioned: All direct expenses which

are amenable for division on some logical or appropriate basis

among the departments should be charged to the departments
after dividing them on a suitable basis. Eg; Salaries, rent,
depreciation etc.

8. Inter-Departmental Transfers: Goods or services that are

transferred from one department to another department. It may
be at cost price or at usual selling price.

9. Closing Stock Reserve: The unrealised profit in the stock of the

receiving department is ascertained. Such profit is included in
the closing stock must be debited to the General Profit & Loss
a/c as Closing Stock Reserve.

10. Opening Stock Reserve: Similarly profit included in the opening

stock must be credited to the General Profit & Loss a/c as
Opening Stock Reserve.

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UNIT III
HIRE PURCHASE AND INSTALMENT
PURCHASE SYSTEMS
1.

Hire Purchase System: According to the Hire Purchase

Act 1972 Section 2 (c) Hire purchase agreement is an
agreement under which goods are let on hire and under
which the hirer has an option to purchase them in
accordance with the terms of the agreement.

2.

Cash Price: This is the retail price of the articles at which

they can be purchased immediately for cash.

3.

Hire Purchase Price: This is the total amount payable by

the buyer, in agreed instalments. This price includes cash
price and interest.

4.

Interest: This is the additional amount apart from the

cash price payable by the buyer as compensation for
postponed payments.

5.

Payment for Interest: The excess of total hire purchase

price over the total cash price is treated as the payment for
interest.

6.

Hire or Instalment: This is the amount payable by the

buyer periodically. The instalments may be equal or
different, depending on agreement.

7.

Down Payment: This is the advance payable by the buyer

while signing the hire purchase agreement. It is also a part
of the hire purchase price.

8.

Hirer: The buyer of the goods on hire purchase basis.

9.

Hire Vendor or Owner: The seller of the goods on hire

purchase basis.

10.

Possession of the goods: The hirer or buyer gets

possession on signing the hire purchase agreement and he
has the right to use them.

11.

Ownership of the goods: The ownership continues to be

with seller or hire vendor. The buyer gets ownership on the
payment of the last instalment.

12.

Relationship: The relationship of hirer and hire vendor is

that of Bailor and Bailee.

13.

Risk of Loss: Hirer not responsible for any loss of goods.

14.

Right of Sale: Hirer cannot sell the goods till he gets the
ownership.

15.

Instalment: Each instalment includes hire charges and

part payment of the hire cash price.

16.

Asset Accrual Method: Under this method, the asset is

deemed to be acquired gradually on the basis of cash price
paid.

17.

Credit Purchase with Interest Method: Under this

method, the asset is deemed to be acquired as soon as it is
received into possession.

18.

CALCULATION OF INTEREST:When the rate of interest, the cash price and the
instalments are given: Under this method, interest is
calculated on the outstanding balance of the cash price at
the stipulated rate.

When total cash price and instalments are given but rate
of interest is not given: The interest included in each
instalment will be calculated on the basis of the hire
purchase price outstanding in the beginning of each year.

When rate of interest and instalments are given but total

cash price is not given: When the amount of each
instalment including the interest and the rate of interest is
given, cash price of the last instalment is found out. This
interest is deducted from last instalment and cash price is
found.

When the rate of interest and total cash price are given
but the instalment price is not given: In this method, the
interest is to be calculated on the outstanding balance of
the cash price at the stipulated rate. Then cash price paid
is deducted from the total cash price and the interest is

calculated for the next period. The instalment price is found

by adding the interest with cash price of each instalment.

Calculation of Cash Price by Annuity method: When in

place of cash price, hire purchase price and annuity rate
are given, the cash price is calculated by multiplying the
amount of instalment with the annuity factor given and
adding down payment (refer no.7) to the product. Then
interest is calculated.

19. Default: If the hire purchaser fails to make payment of any

instalment, it is called Default.
20. Repossession: The hire vendor has the right to take away the
goods sold on hire purchase in the event of default made by the
hire purchaser.
21. Complete Repossession: The hire vendor may take away all the
goods on which there is default of instalment.
22. Partial Repossession: The hire vendor may take away only a
portion of the goods on which there is default of instalment.
23. Stock Method: When numerous sales of small value are made in
addition to normal sales, the hire vendor follows an alterative
method of recording transactions. This method is known as
Stock method.
24. Hire Purchase Stock: These are the total amounts of those
instalments in respect of goods sold on hire purchase which are
to be received in the next accounting period.
25. Purchases (Goods sold during the year): The term purchase is
used when the business is run independently. But if the

business is run as a department, the information relating to

purchases is given under the term Goods sold during the year.
26. Hire Purchase Debtors/Instalment Dues/Customer Paying: It
refers to the total sum of instalments which have become due
but has not been paid by the customers.
27. Stock at Shop/Shop Stock: Goods that are kept in the shop for
sale. When business is run as a department, this information is
not required.
28. METHODS OF COMPUTATION:

Debtors Method: Under this method, the profit or loss

made on goods sold on hire purchase can be found out by
preparing hire purchase trading a/c.

Stock and Debtors Method: The profit made on hire

purchase transactions can also be calculated according to
Stock and Debtors method, by preparing the following
ledger a/cs:
a)
b)
c)
d)
e)

Hire Purchase Stock a/c

Stock at shop a/c
Hire Purchase Debtors a/c
Goods on Hire Purchase a/c
Hire Purchase adjustment a/c.

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INSTALMENT PURCHASE SYSTEM
29. Instalment Purchase System/Deferred Instalment System :
Under this system, the property in goods passes to the

purchaser immediately on signing the contract. In short, sale is

outright but payment is made by different instalments.
30. Act governing: Instalment purchase is governed by Sale of Goods
act.
31. Instalment: Each instalment includes interest and part payment
of cash price.
32. Parties involved: The parties involved are called buyer and seller.
33. Relationship: The relationship is that of a debtor and seller till
last instalment is paid.
34. Right of Sale: Buyer has the right to sell the goods even before
instalments are paid.
35. Risk of Loss: Buyer is responsible for loss of goods because he is
the owner.
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UNIT IV
ADMISSION, RETIREMENT AND DEATH OF A PARTNER

1. Partnership:

Two or more persons joins hands to run a

business, agree to share the capital, the management, the
risk and the profit and losses of the business with mutual
relationship.

2. Partner: The persons who have entered into partnership.

3. Partnership Firm: The persons who have entered into

partnership.

4. Agreement: It is a bond created between two or more

persons to run a business and to share the profits and
losses of the firm. The agreement is reconstituted on the
Admission or Retirement of Partner.

5. Incoming Partner: A person admitted only with the

consent of all the existing partners to the firm.

6. Retiring Partner: A partner may decide to retire from the

firm because of old age, ill health etc. A person who is
retired from the firm is known as an outgoing partner or a
retiring partner.

7. Capital:

In a partnership firm, the transactions relating to

partners are recorded in their respective capital accounts.
There are two methods by which the capital accounts of
partners can be maintained. These are fluctuating capital
method and fixed capital method.

8. Drawings:

It is the amount withdrawn in cash or in kind,

for personal purposes. A drawings account is opened in
the name of each partner and the drawings are debited to
this account. Drawings Account is closed by a transfer to
the respective partners capital account or current
account.

9. Adjustments in Partnership: When a new person is

admitted as partner or the existing partner retires from the

firm, the goodwill, reserves and accumulated profits, profit

sharing ratio, revaluation of assets and liabilities, payment

to retiring partner and the capital should be adjusted, this
is known as Adjustments in Partnership.

10. Absence of Agreement: In the absence of agreement, the

partners shall follow the provisions of the Indian
Partnership Act, 1932. Mainly the partners shall share the
profits and losses of the firm equally irrespective of their
capital contribution.

11. Goodwill:

It is the value of the reputation of the firm

which the business builds up due to its efficient service to
its customers and quality of its products. It is not merely
the past reputation but its continuous existence in future
that makes goodwill a valuable asset. It cannot be seen or
touched. It is an intangible asset but not a fictitious asset.

Implications AS-10 for treatment of goodwill on admission of a

partner
a. If a new partner brings any premium or goodwill over
and above his capital contribution at the time of
admission,such premium or goodwill should be
distributed among the exsiting partner in their
sacrificing ratio
b. If goodwill of the firm is valued at the time of admission
it should not be brought into books because it is
inherent goodwill and not purchased goodwill
c. The value of goodwill evaluated should be adjusted
through partners capital accounts.
IF GOODWILL ALREADY APPERS IN BALANCE SHEET
i. If information is given in the problem that the good
will appearing in balance sheet is purchased or
acquired goodwill,no step is necessary. Good will
appear in balance sheet just like any other asset

ii. If nothing is mentioned whether goodwill in

balancesheet is purchased goodwill or self
generated goodwill.
It should be assumed that it is self generated and was raised and
credited to old partners.
Appilactions of accounting standard
1. Goodwill amount paid privately by new partner to old
partner.
2. Goodwill amount paid in cash fully by the new partner.
3. Goodwill/premium brought in kind(assets)by new partner.
4. Goodwill amount paid partly by the new partner.
5. No goodwill amount is brought in cash by new partner but it
is valued.
6. Hidden goodwill.

12. Profit Sharing Ratio: It is ratio calculated to find out in

what portion the partners share the profits of the firm. It

is calculated during admission or retirement of partner.

13. Sacrificing Ratio:

The ratio in which the old partners

have agreed to sacrifice their shares in profit in favour of a
new partner.

14. Gaining Ratio: The ratio in which the continuing partners

acquire the outgoing partners share is called as gaining
ratio.

15. Reserves: Partners set aside a portion or percentage of

the profit earned to meet the unexpected or unforeseen
losses arises in the future. It is transferred to the capital

accounts of the partners during admission or retirement of

partner.

16. Capacity of Management: If the management is capable,

the firm will earn more profits and that will raise the value
of goodwill.

17. Average Profit:

These are calculated on the basis of past

performance of the business adjusted in the light of future
possibilities. It is useful when goodwill of professional
firms is to be valued.

18. Professional Firms: It is the firms run by qualified

professionals like Chartered Accountants, team of Doctors
etc.

19.

Super profit: It means the profit earned by a firm over

and above the normal profit earned by the other firms in
the same business.

20.

Capitalization Method Under this method, the actual

profit is divided by the normal rate of profit which can be
earned in that particular type of business in order to find
out the total amount which should have been invested as
capital. This amount is compared with the net assets of
the business to find out the value of goodwill.

21. Premium Method:

Under this method, the new partner

brings cash for his share of goodwill and the same is
shared by old partners in their sacrificing ratio.

22. Revaluation Method:

This method is applicable when the

new partner does not bring cash for his share of goodwill.
It is natural to prevent him from getting any share in the
goodwill already built up by the old partners. Accordingly,
the old partners raise goodwill by valuing it at the full
value and dividing the same between themselves in their
original ratio.

23. Memorandum Revaluation Method:

When the new

partner does not bring his share of goodwill in cash, the
goodwill is raised in the books and then is immediately
written off.

24. Hidden Goodwill:

The value of goodwill is inferred on the

basis of total capital of the firm.

25. Revaluation a/c: The changes in the value of assets and

liabilities are recorded in the revaluation account, the
profit or loss will be transferred to the partners capital
a/c. In case of admission, the profit will not be shared
with the new partner where as in retirement; the profits
are shared with the retiring partner.

26. Memorandum Revaluation a/c:

The partners may prefer

to retain the old values in the books by opening an
account called memorandum revaluation account. There
are two parts; the first part is done by preparing normal
revaluation account and in the second part all the entries
made in the first part is reversed and the profit or loss is
found out for the second part.

27. Payment to the Retiring Partner:

On the retirement of a
partner, the amount due to him will have to be paid. The

amount is settled by any one of the following methods

depending upon the partnership deed:
Payment in installments together with interest,
Lump sum payment in cash of the amount due and
Perpetual annuity.

28. Death of a Partner:

When is partner is dead, he leaves

the firm for ever so it is treated as a permanent retirement.
There is no difference between the retirement of a partner
and the death of a partner.

29. Deceased partners share of profit:

The actual share of

the deceased partner in the profit of the firm till the date
of the death can be estimated on the basis of time or on
the basis of sales.

30. Joint Life policy:

A partnership firm may decide to take

Joint Life Insurance Policy on the lives of all partners. The
firm pays the premium and the amount of policy is
payable to the firm on the death of any partner or on the
maturity of policy whichever is earlier.

The objective of taking such a policy is to minimize the financial

hardships to the event of payment of a large sum to the legal
representative of a deceased partner or to the retiring partner.

31. Treatment of Joint Life Policy:

There are three

accounting treatments for joint life policy. They are:
When premium is paid is treated as an expense
(Without maintaining a Joint Life
Policy account).

 The premium paid is treated as an asset (maintaining a

Joint Policy account at its surrender value).
When premium paid is treated as an asset and reserve is
maintained.

UNIT V
DISSOLUTION OF A FIRM

1. Partnership:According to Indian Partnership Act 1932,partnership

is defined as the relationship between persons who have agreed to
share the profits of a business carried on by all or any of them
acting for all.

2. Dissolution of firm: Dissolution of a firm means closing down the

undertaking or suspending permanently the activities of a
partnership business.

3. Dissolution

by agreement: A partnership firm can be dissolved at

any time by mutual consent of all the partners.

4. Compulsory

dissolution: A firm becomes illegal and stands

dissolved when the number of partners exceeds 20.

5. Dissolution

on happening of certain events: A firm may also get

dissolved on the death of a partner.

6. Dissolution

by notice: In case the partnership is at will, on any

partner giving notice in writing to other partners with the

intention to dissolve the firm, it will be treated as dissolved from

the date which is mentioned in the notice.

7. Dissolution

by court: A court can order the dissolution of the

partnership firm when the firm cannot be carried on except with
losses.

8. Payment of losses: Losses including deficiencies of capital shall be

paid first out of profits, next out of capital and lastly, if necessary
by the partners individually in their profit sharing ratio.

9. Distribution

of assets: The assets of the firm including any sums

contributed by the partners to make up deficiencies of capital
shall be applied in paying the debts of the firm to third parties.

10. Payment

of firms debts and personal debts: The property of the

firm shall be applied in the first instance in payment of debts of
the firm and if any surplus remains, it will be applied in payment
of his personal debts. Again, the personal property shall be
applied first in payment of personal debts and if there is any
surplus, it will be applied in payment of firms debts.

11. Realisation account: This account is mainly prepared to show the

profit or loss on realisation of assets and payment of liabilities.The
profit or loss shown by realisation account is transferred to the
capital accounts of the partners in the profit sharing ratio.

12. Treatment of goodwill on dissolution: No special treatment is given

to goodwill. It is treated like other assets.

13. Implicationsos

AS-10 for treatment of goodwill on admission of a

partner

d. If a new partner brings any premium or goodwill over

and above his capital contribution at the time of
admission,such premium or goodwill should be
distributed among the exsiting partner in their
sacrificing ratio
e. If goodwill of the firm is valued at the time of admission
it should not be brought into books because it is
inherent goodwill and not purchased goodwill
f. The value of goodwill evaluated should be adjusted
through partners capital accounts.
IF GOODWILL ALREADY APPERS IN BALANCE SHEET
If information is given in the problem that the good will
appearing in balance sheet is purchased or acquired goodwill,no
step is necessary. Good will appear in balance sheet just like any
other asset
If nothing is mentioned whether goodwill in
balancesheet is purchased goodwill or self generated goodwill

14. Insolvency

of a partner: Where a partner in a firm is adjudicated

an insolvent, he ceases to be a partner on the date on which the
order of adjudication is made, whether or not the firm is thereby
dissolved.

15. Garner Vs Murray rule: The rule that emerged from the Garner vs
Murray case is applied to adjust the loss, if any, due to insolvency.
This rule states that the loss due to insolvency of a partner is to

be charged to the other solvent partners who have a credit balance

in their accounts in the ratio of capitals just before dissolution.

16. Capital ratio under fixed capital method: If the capital accounts of
the partners are fixed throughout the existence of the partnership,
the original capital of the solvent partner will be used as basis for
the division of the insolvent partners deficiency.

17. Capital

ratio under fluctuating capital method: If the capital

accounts of the partners are floating, the deficiency of the
insolvent partners capital account will be shared among the
solvent partners in the ratio of those capitals which were shown in
their capital accounts.

18. Gradual realisation of assets:

In the process of realising the assets

and discharging liabilities, the assets are usually realised slowly,
steadily and gradually depending on the demand and the liabilities
are discharged as and when the assets are realised. Therefore this
process is also known as "gradual realization.

19. Piecemeal

distribution: In actual practice the assets are not

realised at once on a single day unless the business is sold to
somebody.. The process followed to discharge the liabilities and
claims of the partners as and when the assets are realised is
called Piecemeal distribution of cash.

20. Proportionate capital method:

It is necessary to adjust the capital

of the partners to the profit sharing ratio and pay excess
contribution to the partners first as and when the cash is realised.
This process should be repeated till the capitals become
proportionate to profit sharing ratio. When once the excess
contribution of the partner is paid (capitals get adjusted to PSR)
the realisation of cash may be distributed to all the partners in
their capital profit sharing ratio. Since the excess capital
contribution is found out by comparing with PSR and paid first,
this method is called Surplus/Excess Method. This is called
Proportionate Capital/Quotient Method because the capitals are
ought to be bought in proportion to PSR.

21. Maximum

loss method: Maximum loss method is an improved

method of distribution of cash as and when realised. Here at every
stage of distribution of cash realised, it is assumed that there will
be no more realisations and the firm is going to suffer the
maximum loss. Thus, the loss calculated on an assumption is
distributed to partners in their profit sharing ratio before the
partner's claims are paid. The assumption of no more realisations
result in a notional loss.

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SECTION B

1. Distinguish between branch and departmental

accounts.
2. Explain the guidelines for apportionment of expenses
in departmental accounting.
3. Distinguish between hire purchase and instalments
systems.
4. Difference between fixed and fluctuating capital.
5. Explain the contents of partnership deed.
6. Difference between capital and current account.
7. What are the factors affecting goodwill?

8. Difference between sacrificing and gaining ratio.

9. Explain dissolution of a firm and its modes of
dissolution?
10.What do you understand by piece meal distribution?
Explain the methods of making of such distribution.

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