Term and Concept of Accounting

Introduction
of
Financial Accounting
Faizan Ch- MBA, M-Phil Finance
DEFINE BUSINESS
Any legal activity which is doing for the purpose of earning profit is called business.
TYPE OF BUSINESS
Manufacturing
Trading
Servicing
TYPE OF BUSINESS ORGANIZATION
Trading
Partnership
Joint stock company
DEFINE TRANSACTION
Any dealing between two or more person which can change the financial position of the business is called
Transaction.
Type of transactions
Cash Transaction
Credit Transaction
DEFINE BOOK KEEPING.
Recording of business transactions in books of account in prescribed manner.
DEFINE ACCOUNTING.
Accounting is an art of recording, clarifying, summarizing and interpreting the results from financial statements.
DEFINE PROPRIETOR.
He is the owner of the business. He gives time and invests money into the business.
DEFINE CAPITAL.
The amount of cash or the value of goods or both invested by the owner in establishing his business is known as
capital.
or
Owner contribution in business assets is called capital.
DEFINE THE TERM DRAWING.
Withdrawal of cash or goods from the business for private and personal use of the owner is called drawing.
WHAT IS GOODS (MERCHANDISE)?
Anything which is purchased for resale purpose is called goods e.g. cloths are goods for cloth merchant.
DEFINE PURCHASES.
Goods purchased are called purchases, purchases are of two type
Cash Purchases
Credit Purchases
DEFINE CASH PURCHASES.
Goods purchased for cash are called cash purchases.
DEFINE CREDIT PURCHASES.
Goods purchases on credit are called credit purchases.
DEFINE PURCHASES RETURN / RETURN OUTWARD / RETURN TO SUPPLIER.
If goods purchased are returned to the supplier, it is called purchases return. The good are returned when they
are:
Defective
Not according to sample
Damaged
Excess of the quantity ordered for
DEFINE PURCHASES ALLOWANCE.

If the purchaser informs the supplier that some goods are defective and the supplier reduce some amount. This
reduction in price is known purchase allowance.
WHAT IS SALES ALLOWANCE?
If the customer informs the seller that some goods are defective and seller reduced some amount this reduction
in prices is known as sales allowance.
WHAT IS SALES?
Goods sold are called sales. Sales are of two kinds;
Cash sales
Credit sales
WHAT IS CASH SALES?
Goods sold for cash are called cash sales.
WHAT IS CREDIT SALES?
Goods sold on credit are called credit sales.
WHAT IS SALES RETURN (RETURN INWARD)?
If the customer returns the goods it is called sales return goods returned when they are
Defective
Not according to sample
Damaged
Excess of the quantity ordered for
WHAT IS STOCK (INVENTORY)?

Unsold goods are called stock / inventory.
DEFINE VOUCHER
Written evidence in support of business transaction e.g
Cash memo
Invoice
Cash receipt voucher
Cash payment voucher
DEFINE CASH MEMO.
Written evidence in support of cash transaction.
WHAT IS INVOICE?
Written evidence in support of a credit transaction.
WHAT IS DEBTORS (ACCOUNT RECEIVABLE)?
Debtors (account receivable) are those persons from whom the amount is receivable for goods sold on credit.
WHAT IS CREDITORS (ACCOUNTS PAYABLE)?
Creditors (account payable) are those persons to whom the amount is payable for goods purchased on credit.
WHAT IS DISCOUNT?
Reduction in the price of non-defective goods

Trade discount
Cash discount
(a) Discount allowed / Sale Discount
(b) Discount received / Purchases Discount

WHAT IS ALLOWANCE?
Reduction in the price of defective goods
Purchases allowance
Sales allowance
WHAT IS TRADE DISCOUNT?
It is deduction allowed by a trader on the lit price of the goods. It is not recorded in books of account.
WHAT IS CASH DISCOUNT?
Deduction allowed by a creditor to his debtor for making prompt payment is called cash discount.
Types of cash discount
Discount allowed
Discount received
WHAT IS ASSETS?
Valuable things posses by the business are called asset e.g. building, machinery, furniture etc.
TYPES OF ASSETS?
Tangible
Intangible
DEFINE LIABILITIES
Outsider contribution in business assets are called liabilities.
or
These are the amounts payable by the business e.g. bank loans and creditor.
DEFINE EXPENSES
Expense is an expired portion of acquisition price.
or
Cost of goods and services used up in the process of generating income.
Rent paid
Salaries paid
Wages paid
Interest paid
DEFINE EXPENDITURE
The cost of acquiring the assets is called expenditure.
DEFINE INCOME (REVENUE)
It is the price of goods sold or services rendered by the business e.g.
Rent received
Interest received
Commission received
Sales
WHAT IS CASH TRANSACTIONS?
If the value of transaction is met in cash immediately it is called cash transaction.
WHAT IS Credit Transactions?
If the value of transaction is not met in cash immediately it is called credit transaction.
WHAT IS COMMISSION?
It is remuneration for services rendered by one person to another person.
WHAT IS DOUBLE ENTRY SYSTEM?

Systems in which two fold aspect (Dr & Cr) of transaction are recorded.
DEFINE EQUITY
Claim against business assets.
Equity is of two types
Owner equity / capital (owner contribution in business assets)
Outsider equity / liabilities (outsider contribution in business assets)
WHAT IS DRAWINGS?
Cash or Goods withdrawn by the owner from the business for personal use is called drawings.
HOW MANY TYPES OF ACCOUNTING?
Financial accounting
Management accounting
Cost accounting
WHAT IS FINANCIAL ACCOUNTING?
It is an accounting which is used to calculate the profit or loss and observe the financial position of the business.
WHAT IS COST ACCOUNTING?
It is an accounting which is used to calculate cost of product.
WHAT IS MANAGEMENT ACCOUNTING?
It is an accounting which is used for the decision making.
WHAT IS CASH SYSTEM OF ACCOUNTING?
It is a system in which accounting entries are made only when cash received or paid.
WHAT IS ACCRUAL SYSTEM OF ACCOUNTING?
It is a system in which accounting entries are made when transaction carried, whether on cash or on credit.
DEFINE CASH SYSTEM OF ACCOUNTING
It is a system in which accounting entries are made when cash is received or paid.
PARTIES INTERESTED IN ACCOUNTING INFORMATION?
Creditors
Debtors
Owners
Teachers
Students
Government
Employees
WHAT IS SINGLE ENTRY SYSTEM?
A system in which only one effect of transaction is recorded or two effect of transaction is recorded or sometime
no effect of transaction is recorded.
DEFINE DOUBLE ENTRY SYSTEM?
A system in which two fold aspect ( Dr & Cr) of each transaction is recorded.
DEFINE ACCRUAL SYSTEM OF ACCOUNTING
It is a system in which accounting entries are made on the basis of amount having become due for payment or
receipt.
WHAT IS FUNDAMENTAL ACCOUNTING EQUATION?
ASSETS = LIABILITIES + CAPITAL
WHAT IS MEANT BY THE TERM CONCEPT IN ACCOUNTING?
Accounting concept means the basic assumption upon which accounting is based.
DEFINE BUSINESS ENTITY CONCEPT.
According to this concept business is treated as separate person from its owner.
DEFINE GOING CONCERN CONCEPT.
According to this concept business will continue for a long period of time.
DEFINE MONEY MEASUREMENT CONCEPT.
According to this concept we record only those transactions which can be measured in term of money.
DEFINE COST CONCEPT.
According to this concept an asset is recorded in the books at the price at which it was acquired.
DEFINE DUAL CONCEPT.
According to this concept every transaction have two effect. (one is Dr & other is Cr)
DEFINE ACCOUNTING PERIOD.
According to this concept life of a business is divided into small segment (1 Year) and each small segment is
called accounting period e.g. 1ST JANUARY 2005 -------------------------- 31ST DECEMBER 2005
DEFINE MATCHING CONCEPT.
The concept of offsetting expenses against revenue is called matching concept.
or
According to this concept expense are match with income, we should consider only those expenses which are
incurred to generate income of that period.
Net profit (Year2005) = Income (Year 2005) Vs Expenses (Year 2005)
DEFINE REALIZATIONS CONCEPT.
Revenue should be recognized at the time when goods are sold or services are rendered.
DEFINE THE TERM CONVENTION.
It means those customs or traditions which guide the accountant in maintaining the accounting record.
DEFINE CONVERSION OF DISCLOSURE.
It means important information relating to transaction must be disclosed.
DEFINE THE CONVENTION OF MATERIALITY.
It means we should record only those events which are significant and insignificant events should be ignored.
DEFINE CONVENTION OF CONSISTENCY.
It means that accounting practice should remain unchanged from one period to another.
DEFINE CONVENTION OF CONSERVATISM.
It means that uncertain and risk inherit in business transaction should be given a proper consideration.
Natures of Accounts rules of

Debit, credit & Journal
DEFINE ACCOUNT.
A summarized record of business transactions relating to a person or thing is called account.
DEFINE REAL ACCOUNT (PROPERTY ACCOUNT).
Real account deals with those things which tangible visible or which exist in reality like machinery, building etc.
DEFINE NOMINAL ACCOUNT (PROPRIETARY ACCOUNT)?
Nominal account deals with those things which are intangible or invisible or which do not exist in reality like
Salaries rent interest etc.
DEFINE PERSONAL ACCOUNT?
Accounts relating to persons firms companies and industries are personal account like.
EXPLAIN THE TERM OF DEBIT AND CREDIT.
If we divided the page into two part then left hand side will be called debit and right hand side will be called
credit.
HOW MANY NUMBERS OF ACCOUNTS ARE IN BRITISH APPROACH?
There are three types of account are in British approach:
Real account
Nominal account
Personal account
RULES OF DEBIT AND CREDIT ACCORDING TO BRITISH/TRADITIONAL APPROACH.

ACCOUNTS NAME
DEBIT
CREDIT
Real accounts
Coming into business
Going out from business
Nominal Accounts
Expenses
Income
Personal Accounts
Receiving person
Giving person
HOW MANY NUMBERS OF ACCOUNTS IN AMERICAN APPROACH.

There are five accounts in American approach:
Assets
Expenses
Income
Liabilities
Owner equity
RULES OF DEBIT AND CREDIT ACCORDING TO AMERICAN/MODREN APPROACH.
ACCOUNTS NAME
Assets Account
Expense Account
Income Account
Liabilities
Owner equity Account
DEBIT
Increase
Increase
Decrease
Decrease
Decrease
CREDIT
Decrease
Decrease
Increase
Increase
Increase
DEFINE JOURNAL.
The book of account in which business transactions are originally recorded in chronological order are called
journal.
or
Journal has been derived from the French words Jour which means day.
Journal is the first book of accounting in which we record business transaction chronologically.
DEFINE ENTRY.
To enter the transactions in journal is called entry.
DEFINE JOURNALIZING.
The act of recording transactions in journal is called journalizing.
DEFINE NARRATION.
A short explanation of each transaction is written below each entry is called narration.
DEFINE SIMPLE ENTRY.
An entry in which one account is debited and one account is credited is called simple entry.
DEFINE COMPOUND ENTRY.
An entry in which more than one account is debited or more than one account is credited is called compound
entry.
WHY JOURNAL IS CALLED DAY BOOK?
Journal is called day book because all transactions are recorded on daily basis.
WHY JOURNAL IS CALLED BOOK OF ORIGNAL ENTRY / PRIME ENTRY / BASIC ENTRY?
Journal is called book of original entry because transaction first recorded in journal.
Ledger and Trial Balance
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DEFINE LEDGER.
The book in which individual record of each account is maintained.
or
The book in which all the business transactions are finally recorded in the concerned account in a
Summarized and classified form is called ledger.
DEFINE POSTING.
The process of recording business transaction in ledger called posting.
EXPLAIN THE TERM BALANCE.
The difference between the two sides of an account is called balance.
EXPLAIN DEBIT BALANCE.
If the debit side of an account is heavier. Its balance is known as debit balance.
EXPLAIN CREDIT BALANCE.
If the credit side of an account is heavier. Its balance is known as credit balance.
EXPLAIN ZERO BALANCE.
If the two sides of an account are equal then it will be called zero balance.
WHAT ARE THE KINDS OF LEDGER?
There are three kinds of ledger:
Debtor ledger
Creditor ledger
General ledger
DEFINE DEBTOR LEDGER.
It contains the accounts of all the customers (debtors) to whom goods have been sold on credit.
DEFINE CREDITOR LEDGER.
It contains the accounts of all the suppliers (creditor) from whom, good have been purchased on credit.
DEFINE GENERAL LEDGER.
It may contain the records of real and nominal account items.
DEFINE TRAIL BALANCE.
A trial balance is a list of debit and credit balance of all ledger accounts.
It has two purposes:
Check the accuracy of accounts
Prepare a summary of accounts
DEFINE FOLIOING.
When the page number of ledger is recorded in ledger folio column of journal & page number of journal is
recorded in journal folio column of ledger is known as folioing.
EXPLAIN AND DRAW ACCOUNTING CYCLE.
It refers to a complete sequence of accounting procedures which are required to be repeated in same order
during each accounting period.
Transaction
Final Account
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Journal
Trial balance
Ledger
CASH BOOK
(Bank Reconciliation)
(Statement)
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DEFINE CASH BOOK.

A book which is used to record cash transaction is called cash book. Cash receipts are recorded on the left side
and cash payments are recorded on the right side.
DEFINE SINGLE COLUMN CASH BOOK.
The single column cash book makes a record of only cash transactions. Cash receipts are recorded on the left
side and cash payments are recorded on the right side.
DEFINE THE DOUBLE COLUMN CASH BOOK.
The cash book in which cash and bank or cash and discount transactions are recorded is called double
Column cash book.
DEFINE TREBLE COLUMN CASH BOOK.
The cash book in which cash bank and discount transactions are recorded is called treble or three column cash
book.
EXPLAIN CONTRA ENTRY.
An entry which is recorded on the both sides of cash book is called contra entry.
or
An entry in which cash account and bank account are involved and it is recorded on both side of cash
Book is called contra entry.
DEFINE SUBSIDIARY BOOKS.
The journal is sub-divided into different journals known as the subsidiary books/special journals e.g.
Cash book
Purchase journal
Sales journal
Purchases return journal
Sales return journal
B/R book
B/P book
DEFINE PURCHASES BOOK (INVOICE BOOK).
A book in which only transactions of credit purchases are recorded is called purchases book.
DEFINE SALES BOOK.
A book in which only transactions of credit sales are recorded is called sales book.
DEFINE SALES RETURN BOOK.
A book in which all credit sales returned by customer are recorded is called sales return book.
DEFINE PURCHASES RETURNS BOOK.
A book in which all credit purchases returned to supplier are recorded is called purchases return book.
EXPLAIN PETTY CASH BOOK.
The book in which small payments are recorded which are not convenient to record in the cash book is called
petty cash book.
DEFINE DEBIT NOTE.
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If goods bought on credit are returned to the seller for any solid reasons the buyer debit seller account and
inform the seller through a note. This note is called debit note.
DEFINE CREDIT NOTE.
If goods sold on credit are returned by the buyer the seller credits buyer account and informs the buyer through a
note. This note is called credit note.
WHAT IS BANK RECONCILIATION STATEMENT?

It is a statement which contains a complete and satisfactory explanation of the differences in balances
as per cash book and pass book.
DEFINE PASS BOOK.
It is a book prepared by bank which contains detail about the deposits and withdrawals of the account
holder.
GIVE SOME EXAMPLES OF DISAGREEMENT BETWEEN CASH BOOK AND PASS BOOK.
The following are some examples of disagreement:
Cheques issued but not presented
Cheques deposited but not credited
Bank charges
Any mistake made by bank
Any mistake made customer
DEFINE BANK OVERDRAFT / OVERDRAFT / OVERDRAWN
The amount which a bank allowed to a customer to withdraw in excess of his deposits is called bank
overdraft.
DEFINE UN-PRESENTED CHEQUE.
Cheque issued but not presented for payment is called un-presented cheque or Un-paid cheque or
outstanding cheque.
DEFINE UN-CREDITED CHEQUE.
Cheque deposited into the bank by the customer but not credited by the bank is called un-credited cheque or uncollected cheque or un-cleared cheque.
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Account for Incomplete

Records
15
DEFINE DOUBLE ENTRY SYSTEM.

A system in which two fold aspect (Dr & Cr) of each transaction is recorded.
DEFINE SINGLE ENTRY SYSTEM.
System in which only one aspect of transaction is recorded or both aspect of transaction is
recorded or sometime no aspect of transaction is recorded.
FORMULA USED TO CALCULATE NET PROFIT OR LOSS UNDER SINGLE ENTRY
SYSTEM.
Net Profit / Loss = (Closing Capital + Drawings + Interest on Drawings Further Capital
Interest on Capital Opening Capital.
N.P / N.L = C.C + D + IOD FC IOC - OC
WHAT DO YOU MEANT BY STATEMENT OF AFFAIRS?
It is just like a balance sheet which is used to calculate opening capital or closing capital.
or
A statement of affairs is a statement of all assets and liabilities and capital prepared under single
entry system.
DIFFERENTIATE BETWEEN STATEMENT OF AFFAIRS AND BALANCE SHEET.
A statement of affairs is a statement of assets liabilities and capital prepared under incomplete records where as
a balance sheet is a statement of assets liabilities and capital extracted from ledger balances maintained under
double entry system.
WRITE DOWN THE NAMES OF THE METHODS WHICH ARE USED IN SINGLE
ENTRY SYSTEM TO CALCULATE PROFIT.
There are two methods which are used in single entry system to calculate profit.
Increased net worth method
Conversion method
WHAT DO YOU MEANT BY CONVERSION METHOD IN SINGLE ENTRY SYSTEM?
In this method single entry system data is converted into double entry system by ascertaining
missing values and profit is calculated by preparing trading and profit and loss account.
DEFINE NET WORTH METHOD.
Method used to calculate net profit or net loss in single entry system by comparing capital at the
Beginning and end of the year.
Net profit = Adjusted Closing Capital Opening Capital
FORMAT STAMEN OF PROFIT & LOSS

M/S
Statement of profit & loss
For the year ended 31st December xxxx
DETAILS
AMOUNT
(Rs.)
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Closing capital
Add: Drawings
Add: Interest on Drawings
Less: Fresh Capital
Less: Interest on Capital
XXX
XXX
XXX
(XXX)
(XXX)
Adjusted Closing Capital
Less: Opening Capital

Net Profit/ Net Loss
XXX
(XXX)
XXX
Banking Transactions
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DEFINE THE TERM BANK.

A bank is an intermediate party between borrower and lender. It borrows from one party and lends to another.
DEFINE BANK ACCOUNT.
Bank account is used to deposit the money into the bank.
ENLIST THE TYPES OF BANK ACCOUNTS.
There are three types of accounts:
Fixed deposit account
Saving account
Current account
DEFINE FIXED DEPOSIT ACCOUNT.
It is an account in which amount remain fixed for a specific period. The bank allowed high rate of interest on
this account.
DEFINE SAVING ACCOUNT,
It is an account in which amount can be withdrawn but within a specific limit the bank allowed interest on this
account but the rate of interest is lower than the fixed deposit account.
DEFINE CURRENT ACCOUNT.
It is an account in which deposit or withdrawal can be at any time during banking hour. Bank allowed no
interest in current account.
DEFINE CHEQUE.
A cheque is an unconditional order in writing drawn by a customer on his bank requesting to pay on demand a
certain sum of money.
ENLIST THE TYPES OF CHEQUES.
Cheques are of three types:
Bearer cheque
Order cheque
Crossed cheque
DEFINE BEARER CHEQUE.
It is a cheque whose amount is payable to the holder of the cheque.
DEFINE ORDER CHEQUE.
It is a cheque whose amount to payable to a specific person whose name is written on the cheque.
DEFINE DISHONOR TO CHEQUE.
When the amount of cheque is not paid by the bank it is said to be dishonored cheque.
DEFINE CROSSED CHEQUE.
When two parallel lines are drawn across the face of a cheque it is called crossed cheque. It cant be
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enchased at the counter but can be collected only by a bank from the drawee bank.
Type of crossing
Special crossing
General crossing
EXPLAIN PAY-IN-SLIP / CREDIT VOUCHER / DEPOSIT SLIP.
Pay-in-slip is used to deposit the amount in the bank.
DEFINE HUNDIS,
It is an instrument which is used for transferring money one place to another place. It is drawn by one
trading firm on its branch.
ON WHICH GROUNDS THE BANK REFUSE TO HONOUR THE CHEQUE.

The following are the reasons for the dishonor of cheque:
Drawer signature differ
Post dated cheque
Outdated cheque
Mutilated cheque
Not sufficient fund
Amount in word and figure differ
DEFINE ENDORSEMENT OF CHEQUE.
It is an act of sighing on the back of the cheque in order to transfer it someone else who is called the
endorsee.
WHAT IS A BANK- DRAFT?
It is an instrument which is used for transferring money from one place to another place. It is drawn by bank.
EXPLAIN POSTAL ORDER.
It is an instrument is used for transferring money from one place to another place. It is drawn by post
office.
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Bills of Exchange
20
DEFINE BILLS OF EXCHANGE.

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 the instrument.
WHAT ARE THE MAIN FEATURES OF BILLS OF EXCHANGE?
Following are the main Features of Bills of exchange:
it must be writing
it must be signed by the maker
it must be unconditional order to pay
The maker must direct a certain person to pay c certain sum of money.
EXPLAIN PARTIES OF BILLS OF EXCHANGE
1. DRAWER.
The person who draws/writes the bill is known as drawer.
2. DRAWEE
The person who is liable to pay the amount of bill is known as drawee.
3. PAYEE
The person who receives the amount of bill is known as payee.
EXPLAIN CLASSIFICATION OF BILLS OF EXCHANGE:
1. INLAND BILLS.
Inland bills are drawn, accepted and payable in the same country
2. FOREGION BILLS.
Foreign bills are drawn in one country and accepted and payable in another country
EXPLAIN TYPES OF BILL OF EXCHANGE
1. ON THE BASIS OF PERIOD
DEMAND / USANCE BILL OF EXCHANGE.

There is no fixed date for the payment of these bills are called usance bill
TERM BILLS OF EXCHANGE.
These bills are payable after specified period of time e.g. 2 Month, 3 Month
2. ON THE BASIS OF OBJECT
TRADE BILLS.
These bills are drawn and accepted against the sale and purchase of goods.
DEFINE ACCOMMODATION BILLS.
These bills are drawn and accepted without the sale and purchase of goods. The purpose is to help
one party or both financially.
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DEFINE GRACE DAYS.

Three additional days which are allowed to drawee for the payment of bill of exchange are called grace days.
DEFINE TENOR.
Tenor is the period of time after which a bill becomes payable e.g. 2 Month, 3 Month
WHAT IS MEANT BY ACCEPTANCE OF BILL?
When the drawee signs his name on the face of the bill along with the word Accepted the bill is said to be
accepted and this act of the drawee is called acceptance of a bill.
DEFINE THE HOLDER OF THE BILL.
Holder of a bill is a person who is entitle in his own right to the possession thereof and to claim the amount due
There on.
DEFINE GENERAL ACCEPTANCE.
When the bill is accepted without any condition to the order of the drawer it is called general acceptance.
DEFINE QUALIFIED ACCEPTANCE.
When a bill is accepted with some qualified to the order of the drawer it is called qualified acceptance.
DEFINE THE BILLS RECEIVABLE AND BILLS PAYABLE.
When the bill is drawn by drawer and accepted by drawee it is called bills receivable from drawer point of view
and bills payable from drawee point of view.
EXPLAIN THE DISCOUNTING OF A BILL.
If the holder of the bill is in need of money before due date of the bill he may sell it to the bank. The bank will
give cash for it in consideration of small charge. This is called discounting the bill.
DEFINE THE ENDORSEMENT OF BILL.
The procedure by which a bill is transferred from one person to another for the settlement of debts is called
endorsement of bill.
WHEN A BILL BECOMES DISHONORED?
When the drawee fails to make the payment of the bill on the due date.
WHEN A BILL BECOMES HONORED?
When the drawee makes payment of the bill on the due date.
DEFINE NOTING CHARGES.
In case of bill dishonored the notary public charge a small fee from the holder of the bill. The fee is known as
noting charges.
WHAT DO YOU MEANT BY RETIRING OF A BILL?
When the drawee makes payment before the due date of the bill.
DEFINE PROMISSORY NOTE.
An instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of
money only to or to the order of a certain person or to the bearer of the instrument.
EXPLAIN THE PARTIES INVOLVING IN PROMISSORY NOTE.
There are two parties involving in promissory note:
MAKER: The person who draws the promissory note

PAYEE : The person who receives the amount of promissory note
EXPLAIN THE FEATURES OF PROMISSORY NOTE.

Following are the features of promissory note:
It must be in writing
It must be signed by maker
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It must be an unconditional promise to pay by the maker
DIFFERENTIATE BETWEEN PROMISSORY NOTE AND BILLS OF EXCHANGE.

SR NO.
PROMISSORY NOTE
BILLS OF EXCHANGE
It is promise to pay.
It is an order to pay.
Two parties (Maker and Payee)
Three parties (Drawer Drawee and Payee)
There is no need of acceptance
It must be accepted
Capital and Revenue

Account
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DEFINE CAPITAL TRANSACTIONS.

Transactions having long-term effect are known as capital transactions.
DEFINE REVENUE TRANSACTIONS.
Transactions having short-term effect are known as revenue transactions.
WHAT DO YOU MEANT BY CAPITAL EXPENDITURE?
Any expenditure that benefitted the business for long period of time and permanently used in the business for
the purpose of earning revenue is called capital expenditure e.g.
Purchased building
Purchased furniture
WHAT DO YOU MEANT BY REVENUE EXPENDITURES?
Any expenditure that benefitted the business for short period of time is called revenue expenditure e.g.
Salaries paid
Rent paid
WHAT IS CAAPTALIZED EXENDITURE?
Expenditure connected with the purchase of fixed asset are called capitalized expenditure e.g. wages paid for the
installation of machinery.
WHAT ARE THE TREATMENTS OF CAPITAL AND REVENUE EXPENDITURES?
Capital expenditures are shown in the balance sheet assets side while revenue expenditures are shown in the
trading and profit and loss account debit side.
DEFINE CAPITAL PAYMENT.
The amount which is actually paid on account of capital expenditures.
DEFINE REVENUE PAYMENT.
The amount which is actually paid on account of revenue expenditures.
DEFINE DEFERRED REVENUE EXPENDITURES.
Actually it is revenue expenditure but it contains some properties of capital expenditure e.g.
Preliminary expenses.
Research and development cost.
Heavy advertisement and repair.
DEFINE REVENUE RECEIPTS.
Amount received against revenue income are called revenue receipt.
DEFINE CAPITAL RECEIPTS.
Amount received against capital income are called capital receipts.
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DEFINE CAPITAL PROFITS.

Capital profit which is earned on the sale of the fixed assets.
DEFINE REVENUE PROFIT.
The profit which is earned during the ordinary course of business is called revenue profit.
DEFINE CAPITAL LOSS.
The loss suffered by a company on the sale of fixed assets.
DEFINE REVENUE LOSS.
The loss suffered by the business in the ordinary course of business is called revenue loss.
Final Account
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DEFINE FINAL ACCOUNT / FINANCIAL STATEMENTS.

It means statements which are prepared to show the profit or loss and a financial position at the end of period
Trading Profit & Loss Account
Balance Sheet
WHAT IS TRADING ACCOUNT?
It is an account which is prepared to calculate the gross profit or gross loss.
DEFINE GROSS PROFIT.
It is the amount ascertained by the difference between the costs of goods sold and net sales.
GROSS PROFIT = NET SALES - COST OF GOODS SOLD
DEFINE DIRECT EXPENSES.

Expenses connected with the purchase of goods or Manufacturing of Goods or to bring the goods in resale
condition are known as direct expenses. e.g. purchases, wages, carriage in etc.
DEFINE INDIRECT EXPENSES.
All expenses other than direct expenses are called indirect expenses e.g. Salaries. Rent etc.
EXPLAIN PROFIT AND LOSS ACCOUNT.
It is an account which is prepared to calculate the net profit or net loss.
WHAT IS NET PROFIT?
It is an amount ascertained by deducting all indirect expenses from the gross profit.
NET PROFIT = GROSS PROFIT ALL INDIRECT EXPENSES
DEFINE BALANCE SHEET.

It is the statement of assets and liabilities which shows financial position of the business.
DEFINE THE TERM MARSHALLING.
An arrangement in which assets and liabilities are shown in balance sheet.
Permanency Method
Liquidity Method
Mixed Method
DEFINE ASSETS.
Valuable things possess by the business are called assets e.g. Building, Machinery and Furniture etc.
DEFINE REAL ASSETS.
Assets which have some market value are called real assets e.g. Building, Machinery, Furniture etc.
DEFINE FIXED ASSETS.
An asset that is not consumed or sold during the normal course of business, such as Building, Machinery etc.
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DEFINE TANGIBLE ASSETS.

Assets which have physically existence e.g. Building, Machinery, Furniture etc.
DEFINE INTANGIBLE ASSETS.
Assets which have no physically existence e.g. Good will, Trade mark. Patent etc.
DEFINE CURRENT ASSETS / FLOATING ASSETS /CIRCULATING ASSET.).
Asset which can be converted into cash within one year are called current asset e.g. Cash, Bank, Debtors etc.
DEFINE LIQUID ASSETS / QUICK ASSETS.
An asset which can be converted into cash very quickly e.g. Debtors, Cash, and Bank etc.
DEFINE FICTITIOUS ASSETS (DEFFERED COST).
Assets which have no market value are called fictitious assets e.g. preliminary expenses etc.
DEFINE WASTING ASSETS.
Natural resource such as coal, gas, oil that diminishes in value due to depletion are called wasting assets.
DEFINE CONTINGENT ASSETS.
Assets which come into existence upon the happening of a certain event are called contingent assets.
DEFINE LIABILITIES.
Outsider contribution in business assets are called liabilities.
or
These are the amounts payable by the business e.g. bank loans and creditor.
DEFINE EXTERNAL LIABILITIES.
The total amount payable by a business to outsiders (other than owner) are called external liabilities e.g.
Creditors, Bills payable etc.
EXPLAIN INTERNAL LIABILITIES.
The total amount payable by a business to its owner is called internal liabilities.
DEFINE FIXED LIABILITIES.
Liabilities which are payable after a long period of time are called fixed liabilities e.g. Debentures.
EXPLAIN CURRENT LIABILITIES.
Liabilities which are payable within a year are called current liabilities e.g. creditors, Overdraft, bills payable
etc.
EXPLAIN LIQUID OR QUICK LIABILITIES.
Liabilities which are payable within a month are called liquid or quick liabilities e.g. Outstanding Expenses,
Creditors, Overdraft etc.
EXPLAIN CONTINGENT LIABILITIES.
Liabilities which come into existence upon the happening of a certain event are called contingent liabilities e.g.
Bill Receivable discounted with bank.
DEFINE CAPITAL.
The amount of cash or the value of goods or both invested by the owner in establishing his business are called
capital.
DEFINE TRADING CAPITAL.
The portion of business fund which is represented by fixed assets and floating assets is called trading capital.
DEFINE FIXED CAPITAL.
The portion of business fund which is represented by fixed assets is called fixed capital.
27
DEFINE CIRCULATING CAPITAL.

The portion of business fund which is represented by floating assets is called circulating capital.
DEFINE WORKING CAPITAL.
The excess of current assets over current liabilities is called working capital.
WORKING CAPITAL = CURRENT ASSET CURRENT LIABILITIES
DEFINE BAD DEBTS.

The debts which are irrecoverable form debtors are called bad debts.
DEFINE DOUBTFUL DEBTS.
The debt whose recovery is doubtful is called doubtful debts.
EXPLAIN BAD DEBTS RECOVERED.
Debts which are written off as bad, if recovered in future are called bad debts recovered.
DEFINE DEBT.
Amount due from debtor is called debt.
DEFINE PROVISION.
Amount set aside out of profit for a possible loss or liability is called provision
DEFINE COST OF GOODS SOLD.
It represents the sum of the cost of all goods sold
Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses Closing Stock
DEFINE ADJUSTMENTS.
It means to adjust the incomes or expenses according to current year.
EXPLAIN OUTSTANDING EXPENSES.
Expenses of the current year which are still payable are called outstanding expenses.
Date
Particular
L/
F
Expenses account
To outstanding expense account
DEBIT(RS.)
CREDIT(Rs.
)
XXXX
XXXX
EXPLAIN PRE-PAID EXPENSE.

Expenses of the next year paid in current year as an advance payment are called prepaid expenses.
Date
Particular
L/
F
Pre-paid Expenses account

To Expense account
DEBIT(RS.)
CREDIT(Rs.
)
XXXX
XXXX
EXPLAIN OUTSTANDING INCOME.

Incomes of the current year which are still receivable are called outstanding income.
Date
Particular
L/
F
Outstanding Income account

To Income account
DEBIT(RS.)
CREDIT(Rs.
)
XXXX
XXXX
28
EXPLAIN UNEARNED INCOME.

Income of the next year received in current year as an advance receipt are called unearned income.
Date
Particular
L/
F
Income account
To Unearned Income account
DEBIT(RS.)
CREDIT(Rs.
)
XXXX
XXXX
EXPLAIN DEPRECIATION.
Gradual and permanent decrease in the value of fixed asset is known as depreciation.
Date
Particular
L/
F
Depreciation account
To Asset account
DEBIT(RS.)
CREDIT(Rs.
)
XXXX
XXXX
WHAT IS PROVISION FOR DOUBTFUL DEBTS / ALLOWANCES FOR UNCOLLECTABL?

Provision which is created for doubtful debts are called provision for doubtful debts.
Date
Particular
L/
F
Profit & Loss a/c

To Provision for doubtful debts a/c
WHAT IS PROVISION FOR DISCOUNT ON DEBTOR?
Provision which is created for estimated amount of discount to debtors.
Date
Particular
L/
F
Profit & Loss a/c

To Provision for discount on debtor a/c
DEBIT(RS.)
CREDIT(Rs.
)
XXXX
XXXX
DEBIT (RS.)
CREDIT(Rs.
)
XXXX
XXXX
WHAT IS PROVISION FOR DISCOUNT ON CEDITOR?

Provision which is created for estimated amount of discount from creditors.
Date
Particular
L/
F
Provision for discount on creditor a/c

To Profit & Loss a/c
DEBIT (RS.)
CREDIT(Rs.
)
XXXX
XXXX
ADJUSTING ENTRY FOR INTEREST ON CAPITAL?
Date
Particular
L/
F
Interest on capital account

To Capital account
DEBIT (RS.)
CREDIT(Rs.
)
XXXX
XXXX
29
WHAT IS ADJUSTING ENTRY FOR INTEREST ON DRAWINGS?
Date
Particular
L/
F
DEBIT (RS.)
Drawings account
To Interest on drawings account
CREDIT(Rs.
)
XXXX
XXXX
ADJUSTING ENTRY FOR CLOSING STOCK?
Date
Particular
L/
F
DEBIT (RS.)
Closing stock account

To Trading account
CREDIT(Rs.
)
XXXX
XXXX
DEFINE INCOME STATEMENT.

A statement which is prepared to calculate net income or net loss of the business.
DEFINE OPERATING EXPENSES.
Expenses which are incurred for the generation of income are called operating expenses.
DEFINE SELLING EXPENSES.
Expenses which are incurred for the sale of goods are called selling expenses.
DEFINE ADMINISTRATIVE EXPENSES.
Expenses which are connected with the office are called administrative expenses.
30
Rectification of Error
IN HOW MANY CLASSES ERRORS ARE DIVIDED?

Errors are divided into two classes:
Book keeping errors
Trial balance errors
DEFINE BOOK KEEPING ERRORS.
Errors which are incurred in the original book of account Journal & ledger.
DEFINE ERROR OF TRIAL BALANCE ERRORS.
Errors which are incurred in the preparation of trial balance are called trial balance errors.
DEFINE ERROR OF OMISSION.
If the transaction has been completely omitted from the books of account then it will be called error of
omission.
DEFINE ERROR OF COMMISSION.
It means that the amount of a transaction has been wrongly recorded in the journal and the same wrong amount
was also posted in the ledger e.g.
Posting of wrong amount in the ledger
Posting an amount to a wrong account
DEFINE ERROR OF PRINCIPLE.
Error which arises due to ignorance of the fundamental principles of accounting e.g. repair of furniture has been
wrongly debited to furniture account.
31
DEFINE COMPENSATING ERRORS.

Compensating errors means an error which is cancelled by another error of same amount in opposite
Direction.
DEFINE ERROR OF POSTING.
If the transaction has been recorded in the journal but not posted in ledger then it will be called error of posting.
DEFINE ERROR OF CASTING.
An error due to which total of an account is more or less recorded is known as error of casting.
Under cast
Overcast
DEFINE UNDER CAST.
An error due to which total of an account is less recorded e.g. sales book has been under cast by Rs.90
DEFINE OVER CAST.
An error due to which total of an account is more recorded e.g. sales book has been over cast by Rs.90
DEFINE SUSPENCE ACCOUNT.
It is an account in which we entered transactions which cant be placed to their proper account due to lack of
information.
32
Depreciation
DEFINE THE TERM DEPRECIATION.

Depreciation means gradual and permanent decrease in the value of fixed asset by any cause.
WHAT ARE THE CAUSES OF DEPRECIATION?
1. Internal Causes
Wear & Tear
Depletion
2. External Causes
Obsolescence
Accident
Efflux of time
DEFINE FIXED ASSETS.
An asset that is not consumed or sold during the normal course of business, such as Building,
Machinery etc.
DEFINE TANGIBLE ASSETS.
Assets which have physical existence e. g. Furniture, Building, Machinery etc.
DEFINE INTANGIBLE ASSETS.
Assets which have no physical existence like Goodwill, Trade Mark etc.
DEFINE CURRENT ASSETS.
Asset which can be converted into cash within one year are called current asset e.g. Cash, Bank, Debtors etc.
33
DEFINE WASTING ASSETS.

Natural resource such as coal, gas, oil that diminishes in value due to depletion is called wasting assets.
DEFINE AMORTIZATION.
Decrease in the value of intangible fixed assets is called amortization e.g. Trade Mark, Goodwill etc.
DEFINE DEPLETION.
Decrease in the value of wasting assets is called depletion e.g. Mines, Oil wells etc.
DEFINE COST PRICE OF AN ASSET.
It includes all expenses e.g. purchase price, installation and erection charges etc.
Cost Price = Purchase Price + All Capitalized Expenditures
DEFINE WRITTEN DOWN VALUE.
Amount yet to b allocated for depreciation is called written down value.
DEFINE ACCUMULATED DEPRECIATION.
The total depreciation charged in different accounting period is called accumulated depreciation.
or
Sum of the depreciations of all the accounting period is called accumulated depreciation.
DEFINE SCRAP / BREAKUP / SALVAGE / RESIDUAL VALUE.
The price at which the asset will be sold at the end of its working life is called scrape value.
DEFINE BOOK VALUE OF ASSET.
Value according to the books of account is called book value of asset.
Book value = Cost Price of an Assets Accumulated Depreciation
DEFINE WEAR AND TEAR.
Change in shape of assets due to use in business is called wear and tear.
DEFINE STRAIGHT LINE METHOD.
A method of depreciation in which the amount of depreciation remains same every year is called straight line
method.
WHAT IS THE FORMULA FOR THE CALCULATION OF ANNUAL DEPRECIATION?
UNDER STRAIGHT LINE METHOD?
Annual Depreciation = Cost Scrape Value/Estimated life
WHAT IS THE FORMULA FOR THE CALCULATION OF RATE OF DEPRECIATION
UNDER DIMINISHING BALANCE METHOD?
R = [1 - (s / c)] 1 / n
Where
R = Rate of depreciation
S = Scrape Value
C = Cost price
N = Life / Number of year
DEFINE DIMINISHING BALANCE METHOD / REDUCING BALANCE METHOD /
REDUCING INSTALLMENT METHOD / WRITTEN DOWN VALUE METHOD.
Under this method depreciation is charged with fixed rate on book value of asset and amount of depreciation
decrease every year.
NAME OF TWO COMMON METHOD USED IN DEPRECIATION
The common used method of depreciation is as follows:
Straight line method
34
Diminishing balance method
WHAT IS THE ENTRY OF DEPRECIATION / ADJUSTING ENTRY OF

DEPRECIATION?
Date
Particular
Depreciation Account
To Asset Account
L/F
DEBIT (RS.)
XXXX
CREDIT(Rs.)
XXXX
WHAT IS THE CLOSING ENTRY OF DEPRECIATION?

Date
Particular
Profit & Loss Account
To Depreciation Account
L/F
DEBIT (RS.)
XXXX
CREDIT(Rs.)
XXXX
WHAT IS THE OBJECT OF PROVIDING DEPRECIATION?

The objects of providing depreciation are:
To find out the net profit or loss
To ascertain the cost of production
To ascertain the true value of assets
35
Consignment Account
DEFINE CONSIGNMENT.
Consignment is an act of sending goods by owner to his agent from one place to another for the purpose of sale.
ENLIST THE PARTIES INVOLVED IN CONSIGNMENT.
There are two parties involve in consignment:
Consignor
Consignee
DEFINE CONSIGNOR.
The owner who sends his goods for sale purpose to his agent is known as consignor.
DEFINE CONSIGNEE.
The person to whom the goods are sending for sale purpose is known as consignee.
DEFINE CONSIGNMENT OUTWARD.
When the goods are dispatched by the consignor to the consignee, it will be a consignment
outward from consignor point of view.
DEFINE CONSIGNMENT INWARD.
When the goods are dispatched by the consignor to the consignee, it will be a consignment
inward from consignee point of view.
DEFINE ACCOUNT SALE.
It is a periodic statement delivered by consignee to consignor about the goods sold; price realized his
commission and the expenses incurred in connection with the sale.
36
DEFINE PERFORMA INVOICE.

It is a statement sends by consignor to consignee showing quantity quality and price of goods
delivered.
DEFINE COMMISSION.
The remuneration denoted to consignee for selling the goods of the consignor is called
commission.
DEFINE DELCREDRE COMMISSION.
The extra commission which is paid to consignee if loss on account of bad debts is born by him.
DEFINE OVERRIDING COMMISSION.
A commission paid to the consignee by consignor for pushing a new product in the market is
called overriding commission.
DEFINE CONSIGNMENT ACCOUNT.
It is a nominal account which is prepared to calculate profit or loss on consignment.
DEFINE NORMAL LOSS.
The loss arises due to natural causes such as evaporation, shrinkage, leakage, evaporation etc, is called normal
loss.
DEFINE ABNORMAL LOSS.
The loss arises accidentally such as loss by fire loss by theft etc. is called abnormal loss.
DEFINE NON-RECURRING EXPENSES (DIRECT EXPENSES).
It include expenses incurred to bring the goods to godown of the consignee such as Cartage,
Carriage, Railway charges etc.
DEFINE RECURRING EXPENSES (INDIRECT EXPENSES).

It include expenses incurred on selling the goods e.g. Commission, Selling expenses etc.
FORMULA TO CALULATE UN-SOLD STOCK

Cost of un-sold unit
xxx
Add: Consignor all expenses (Prop)
xxx
Add: Consignee direct expenses (Prop)
xxx
Un-sold Stock
xxx
37
38
Joint Stock Company
DEFINE JOINT STOCK COMPANY.

Company is an artificial person created by law having separate legal entity with perpetual
existence and common seal.
DEFINE SEPARATE LEGAL ENTITY.
It means the company is distinct from the person forming it.
DEFINE PERPETUAL EXISTENCE.
It means a Joint stock company has a continuous life.
DEFINE COMMON SEAL.
The official signature of the company is termed as Common seal of the company.
DEFINE PROMOTERS.
The persons who undertake the responsibility of bringing a company into existence.
DEFINE PRELIMINARY EXPENSES.
The expenses which are incurred in the formation of the company are called preliminary
expenses.
39
DEFINE PUBLIC LIMITED COMPANY.

According to the companies ordinance 1984:
It can be formed by at least seven members and there is no limit on maximum members.
It can invite application from investors through advertisement in the newspapers.
DEFINE PRIVATE LIMITED COMPANY.
According to the company ordinance 1984 it can be formed by:
At least two persons and its total membership cannot exceed 50.
It cannot invite application from investors through advertisement in the newspapers.
DEFINE UNLIMITED COMPANY.
A company in which the liability of its shareholder is unlimited is called unlimited company.
DEFINE COMPANY LIMITED BY GUARANTEE.
A company in which each member gives a guarantee to contribute a specified sum to the
Company in the event of its winding up.
DEFINE COMPANY LIMITED BY SHARE.
A company in which the liability of its members is limited to the shares they held.
DEFINE SHARES.
The capital of a company divided into several small units and each unit is called shares.
DEFINE FACE VALUE OF SHARE.
The value which is written on the face of the share is called face value or par value of share.
DEFINE BOOK VALUE OF SHARE.
The value of shares according to the books of the company is called book value of share.
DEFINE MARKET VALUE OF SHARE.
The price at which buyer is willing to purchase and seller is willing to sell is called market value of share.
EXPLAIN ISSUE OF SHARES AT PREMIUM.
If the shares are issued more than its face value then it will be called issued at premium.
EXPLAIN ISSUE OF SHARES AT DISCOUNT.
If the shares are issued less than its face value then it will be called issued at discount.
DEFINE SHARE CAPITAL.
The total sum of the face value of shares of a company is called share capital.
DEFINE AUTHORIZED CAPITAL / NOMINAL CAPITA / REGISTERED CAPITAL.
It is the amount of capital with which the company is registered is called authorized.
DEFINE ISSUED CAPITAL.
Shares offered to general public for contribution are known as shares issued. The total face value of such shares
is called issued capital.
DEFINE SUBSCRIBED CAPITAL.
It is that part of the issued capital which has been taken up by the public. The total face value of such shares is
called subscribed capital.
DEFINE CALLED UP CAPITAL.
It is that portion of the subscribed capital which has been called up by the company.
DEFINE PAID UP CAPITAL.
It is that portion of the called up capital that has been actually paid up by shareholders.
DEFINE RESERVE CAPITAL.
40
It is that portion of subscribed capital which the company, through a special resolution, reserve to call in the
event of winding up.
DEFINE THE MEMORANDUM OF ASSOCIATION.
This is a document defining the constitution of the company. It is known as the charter of the
Company.
DEFINE PROSPECTUS.
It is a valuable document issued by the company for raising the capital.
WHAT IS MEANT BY MINIMUM SUBSCRIPTION?
The minimum number of shares for which a person should apply if he want to purchase the
Shares.
DEFINE UNDERWRITER.
The person who take the risk of unsold shares.
DEFINE UNDERWRITING COMMISSION.
The commission which is paid to underwriter is called underwriter commission.
DEFINE OVER SUBSCRIPTION.
If company received application for shares more than it offered to public then such a condition is called over
subscription.
DEFINE UNDER SUBSCRIPTION.
If company received application for shares less then it offered to public then such a condition is called under
subscription.
DEFINE DEBENTURES.
It is an acknowledgement of debt.
DEFINE REDEEMABLE DEBENTURES.
Those debentures which are redeemable at the end of a specific period are called redeemable
debenture.
DEFINE IRREDEEMABLE DEBENTURES.
Those debentures which are not redeemable during the life of the company are called
irredeemable debentures.
DEFINE NAKED DEBENTURES.
Those debentures which carry no security are called naked debentures.
DEFINE MORTGAGE DEBENTURES.
Those debentures which are secured against fixed assets are called mortgage debentures.
DEFINE NON-CONVERTIBLE DEBENTURES.
Those debentures which are not convertible into shares are called non-convertible debentures.
DEFINE DEBENTURES STOCK.
The debentures which must always be fully paid are called debentures stock.
DEFINE REGISTERED DEBENTURES.
Those debentures which are registered in the name of specific person and they are not
transferable are called registered debentures.
DEFINE BEARER DEBENTURES.
Those debentures which are transferable and whose amount is payable to the holder are called
41
bearer debentures.
DEFINE CONVERTIBLE DEBENTURES.
Those debentures which are convertible into shares are called convertible debentures.
42
Partnership
DEFINE PARTNERSHIP.
According to Partnership Act 1932: The relation between persons who have agreed to share profit of a
business carried on by all or any one of them acting for all.
DEFINE THE TERMS PARTNERS.
The persons who form the partnership are individually called Partner and collectively known as Firm
EXPLAIN PARTNERSHIP DEED / PARTNERSHIP AGREEMENT.
A document, which contains all necessary rules and regulations required to run the partnership business
DEFINE ACTIVE PARTNER.
Partner who takes active part in the management of the business is called active partner.
DEFINE SLEEPING PARTNER / DORMANT PARTNER / NON-ACTIVE PARTNER.
Partner who does not take active part in the management of the business is called sleeping
partner.
43
DEFINE SECRET PARTNER.

He invests his capital and take active part in the business activities but public does not know him as partner of
firm.
DEFINE NOMINAL PARTNER / QUASI PARTNER.
He neither invests capital nor shares the profit or loss of the firm. Firms only use the name and good reputation
of this partner.
DEFINE SENIOR PARTNER.
A person who has major investment and takes active part in the business is called senior partner.
DEFINE JUNIOR PARTNER.
A person who has minor investment in the business is called junior partner.
DEFINE MINOR PARTNER.
Partner whose age is less than 18 years is called minor partner.
DEFINE MAJOR PARTNER.
Partner whose age is 18 years or more is called major partner.
DEFINE RETIRED PARTNER.
A person who leaves the firm due to certain reason or event is known as retired partner.
DEFINE DECEASED PARTNER.
The partner whose life has expired is known as deceased partner.
DEFINE GOODWILL.
Good name and reputation of the business is called goodwill.
WHAT IS THE FORMULA FOR THE CALCULATION OF GOODWILL IN AVERAGE METHOD?
Goodwill = Average Profit Number of Purchase Years
DEFINE SUPER PROFIT.
Super profit is the excess of actual profit over the normal profit of an enterprise.
EXPLAIN PROFIT OR LOSS APPROPRIATION ACCOUNT.
It is an account which is used for the division of profit among partners is called profit & loss
appropriation account.
WHAT IS MEANT BY FLUCTUATING CAPITAL IN PARTNERSHIP?

It means all adjustments with regard to the interest on capitals interest on drawings partners
salaries etc are passed through the capital accounts of partners
WHAT IS MEANT BY FIXED CAPITAL IN PARTNERSHIP?
It means all adjustments with regard to the interest on capitals interest on drawings partners
salaries etc are passed through current accounts of partner.
WHAT IS MEANT BY SACRIFICE RATIO?
It is the ratio which shows the sacrifice of the old partner at the time of admission of new partner.
Sacrifice Ratio = Old Ratio New Ratio
WHAT IS MEANT BY GAINING RATIO?
It is the ratio which shows the gain of the remaining partner after the retirement or death of
existing partner.
Gaining Ratio = New Ratio Old Ratio
WHAT IS THE REVALUATION ACCOUNT?
It is an account which shows the increase or decrease of assets or liabilities. It is normally
44
prepared at the time of admission, Retirement of a partner.

WHAT IS DISSOLUTION OF PARTNERSHIP?
Any change in the agreement among partners dissolves the partnership but does not the firm.
DEFINE DISSOLUTION OF FIRM.
According to Partnership Act 1932:
The dissolution of partnership between all the partners of a firm is called dissolution of firm.
WHAT IS REALIZATION ACCOUNT?
It is an account which shows profit or loss on the dissolution of a firm.
WHAT IS DISSOLUTION BY AGREEMENT?
Firm may be dissolved with the consent of all partners in accordance with the partnership
Agreement.
DEFINE PARTNERSHIP AT WILL.
According to partnership act 1932:
When no provision is made in partnership agreement for the duration of partnership then the
Partnership is called Partnership-At-Will.
DEFINE COMPULSORY DISSOLUTION OR DISSOLUTION BY THE OPERATION OF LAW.
A firm is compulsory dissolved when the business become unlawful or all the partners become insolvent.
EXPLAIN THE CIRCUMSTANCES ON WHICH THE FIRM MAY BE DISSOLVED BY COURT.
Firm many be dissolved by court
Unsound mind
Incapability of partner.
Misuse of power.
Breach of partnership agreement.
Transfer of share.
Continuous loss.
EXPLAIN GARNER VS MURRAY RULE.
According to this rule the deficiency of the insolvent partners capital is to be borne by solvent partners in the
proportion of their capitals.
45

Term and Concept of Accounting

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Term and Concept of Accounting

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Introduction

Faizan Ch- MBA, M-Phil Finance

Faizan Ch- MBA, M-Phil Finance

Excess of the quantity ordered for

DEFINE PURCHASES ALLOWANCE.

WHAT IS STOCK (INVENTORY)?

Reduction in the price of non-defective goods

Faizan Ch- MBA, M-Phil Finance

(b) Discount received / Purchases Discount

Faizan Ch- MBA, M-Phil Finance

WHAT IS DOUBLE ENTRY SYSTEM?

Faizan Ch- MBA, M-Phil Finance

Faizan Ch- MBA, M-Phil Finance

Natures of Accounts rules of

Faizan Ch- MBA, M-Phil Finance

RULES OF DEBIT AND CREDIT ACCORDING TO BRITISH/TRADITIONAL APPROACH.

Coming into business

Going out from business

HOW MANY NUMBERS OF ACCOUNTS IN AMERICAN APPROACH.

Faizan Ch- MBA, M-Phil Finance

Faizan Ch- MBA, M-Phil Finance

Ledger and Trial Balance

Faizan Ch- MBA, M-Phil Finance

Faizan Ch- MBA, M-Phil Finance

Faizan Ch- MBA, M-Phil Finance

DEFINE CASH BOOK.

Faizan Ch- MBA, M-Phil Finance

WHAT IS BANK RECONCILIATION STATEMENT?

Faizan Ch- MBA, M-Phil Finance

Account for Incomplete

Faizan Ch- MBA, M-Phil Finance

DEFINE DOUBLE ENTRY SYSTEM.

FORMAT STAMEN OF PROFIT & LOSS

Faizan Ch- MBA, M-Phil Finance

Less: Opening Capital

Faizan Ch- MBA, M-Phil Finance

DEFINE THE TERM BANK.

Faizan Ch- MBA, M-Phil Finance

ON WHICH GROUNDS THE BANK REFUSE TO HONOUR THE CHEQUE.

Faizan Ch- MBA, M-Phil Finance

Faizan Ch- MBA, M-Phil Finance

DEFINE BILLS OF EXCHANGE.

DEMAND / USANCE BILL OF EXCHANGE.

2. ON THE BASIS OF OBJECT

Faizan Ch- MBA, M-Phil Finance

DEFINE GRACE DAYS.

MAKER: The person who draws the promissory note

EXPLAIN THE FEATURES OF PROMISSORY NOTE.

Faizan Ch- MBA, M-Phil Finance

It must be an unconditional promise to pay by the maker

DIFFERENTIATE BETWEEN PROMISSORY NOTE AND BILLS OF EXCHANGE.

Two parties (Maker and Payee)

Three parties (Drawer Drawee and Payee)

There is no need of acceptance

Capital and Revenue

Faizan Ch- MBA, M-Phil Finance

DEFINE CAPITAL TRANSACTIONS.

Faizan Ch- MBA, M-Phil Finance

DEFINE CAPITAL PROFITS.

Faizan Ch- MBA, M-Phil Finance

DEFINE FINAL ACCOUNT / FINANCIAL STATEMENTS.

DEFINE DIRECT EXPENSES.

DEFINE BALANCE SHEET.

Faizan Ch- MBA, M-Phil Finance