Accounting Short Note-2015

Deferred expense:

A deferred expense is a cost that has already been incurred, but which has not yet been consumed. The cost is
recorded as an asset until such time as the underlying goods or services are consumed; at that point, the cost is
charged toexpenseA deferred expense is a cost that has already been incurred, but which has not yet been consumed.
The cost is recorded as an asset until such time as the underlying goods or services are consumed; at that point, the
cost is charged to expense.A deferred expense is initially recorded as an asset, so that it appears on the balance sheet
(usually as a current asset, since it will probably be consumed within one year).

From a practical perspective, it makes little sense to defer the expenses associated with smaller amounts of
unconsumed goods and services, since the accountant must manually enter the deferral in the accounting software
(rather than to the pre-set expense account), as well as remember to charge these items to expense at a later date.
Instead, charge these items to expense immediately, as long as there is no material effect on the financial statements.
This reserves only larger transactions for deferral treatment. A good example of items that are not necessarily
consumed at once, but which are charged to expense immediately are office supplies.

As an example of a deferred expense, ABC International pays $10,000 in April for its May rent. It defers this cost at
the point of payment (in April) in the prepaid rent asset account. In May, ABC has now consumed the prepaid asset,
so it credits the prepaid rent asset account and debits the rent expense account.

Other examples of deferred expenses are:

Interest costs that are capitalized as part of a fixed asset for which the costs were incurred
Insurance paid in advance for coverage in future months
The cost of a fixed asset that is charged to expense over its useful life in the form of depreciation
The cost incurred to register the issuance of a debt instrument
The cost of an intangible asset that is charged to expense over its useful life as amortization

You should defer expenses when generally accepted accounting principles or international financial reporting
standards require that they be included in the cost of a long-term asset, and then charged to expense over a long
period of time. For example, you may have to include the cost of interest in the cost of a constructed asset, such as a
building, and then charge the cost of the building to expense over the useful life of the entire asset in the form
of depreciation. In this case, the cost of the interest is a deferred expense.

Accounting Policies:
Accounting policies are the specific policies and procedures used by a company to prepare its financial statements.
These include any methods, measurement systems and procedures for presenting disclosures. Accounting policies
differ from accounting principles in that the principles are the rules and the policies are a company's way of adhering
to the rules. Accounting principles are lenient at times, so the policies of a company can be very important. Looking
into a specific company's accounting policies can signal whether management is conservative or aggressive when
reporting earnings. This should be taken into account by investors when reviewing earnings reports. Also,
outside accountants that are hired to review a company's financial statements should check the company's policies to
ensure they conform to accounting principles Accounting policies are the specific principles, bases, conventions,
rules and practices applied by an entity in preparing and presenting financial information. [3]

Where an IFRS specifically applies to a transaction, event or condition, the accounting policy applied to that item
should be determined by reference to that standard. When no standard applies specifically to a transaction, event or
condition, management should use its judgement to develop a policy that results in information that is relevant to the

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Accounting Short Note-2015

economic decision-making needs of users and reliable, such that the financial statements faithfully represent the
financial position, performance and cashflows of the entity, reflect the economic substance of transactions, events
and conditions, are free from bias, prudent, and complete in all material respects

In making judgement, management should take into account (in the following order) the requirements in IFRSs
dealing with similar and related issues, and the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the Conceptual Framework. Management may also consider recent
pronouncements of other standard-setting bodies, accounting literature and accepted industry practices, to the extent
that these do not conflict with IFRSs and the Framework.

Accounting policies should be applied consistently for similar transactions, events or conditions, unless an IFRS
requires or permits different accounting policies to be applied to different categories of items

An entity can change an accounting policy only if it is required by an IFRS or results in the financial statements
providing reliable and more relevant information. If the change is due to requirement by an IFRS, an entity shall
account for the change from the initial application of the IFRS in accordance with the specific transitional provisions
(i.e. the standard may specify retrospective application or only prospective application), if any. Where there are no
specific transitional provisions in the IFRS requiring the change in accounting policy, or an entity changes an
accounting policy voluntarily, it should apply the change retrospectively.

Where a change in accounting policy is applied retrospectively, an entity should adjust the opening balance of each
affected component of equity for the earliest prior period presented and the other comparative amounts for each
prior period presented as if the new accounting policy had always been applied. The standard permits exemption
from this requirement when it is impracticable to determine either the period-specific effects or cumulative effect of
the change

Trend Analysis :

A trend analysis is a method of analysis that allows traders to predict what will happen with a stock in the
future. Trend analysis is based on historical data about the stock's performance given the overall trendsof the
market and particular indicators within the market. Method of time series data (information in sequence over
time) analysis involving comparison of the same item (such as monthly sales revenue figures) over a
significantly long period to (1) detect general patter of a relationship between associated factors or variables, and
(2) project the future direction of this pattern.
A trend analysis is a method of analysis that allows traders to predict what will happen with a stock in the future.
Trend analysis is based on historical data about the stock's performance given the overall trends of the market and
particular indicators within the market.

Trend analysis takes into account historical data points for a stock and, controlling for other factorslike the general
changes in the sector, market conditions, competition for similar stocks, it allows traders to forecast short,
intermediate, and long term possibilities for the stock.

By watching the general trends of the markets, a trader may be able to match purchases and salesof particular stocks,
maximizing his or her potential for profits. At the same time, it is important to look at historical data in a larger
context of conditions for the underlying company to understand if there are factors that may affect a stock's value
irrespective of general market conditions or past performance. For example, a trader should look inside the financial
conditions of the company, understand the market and technologies, and anticipate competitive pressures on the
company within its sector. All of these tolls, as well as trend analysis, benefit a trader. Trend analysis means

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Accounting Short Note-2015

looking at how a potential driver of change has developed over time, and how it is likely to develop in the future.
Rational analysis of development patterns provides a far more reliable basis for speculation and prediction than
reliance on mere intuition. Several trends can be combined to picture a possible future for the sector of interest, such
as schooling. Trend analysis does not predict what the future will look like; it becomes a powerful tool for strategic
planning by creating plausible, detailed pictures of what the future might look like.

he large range of possibilities opened by trend analysis makes it key for developing robust scenarios that meet
essential criteria:

Plausible: Logical, consistent and believable

Relevant: Highlighting key challenges and dynamics of the future
Divergent: Different from each other in strategically significant ways
Challenging: Questioning fundamental beliefs and assumption

Balance of payments:

The balance of payments, also known as balance of international payments and abbreviated BoP, of a country is the
record of all economic transactions between the residents of the country and the rest of the world in a particular
period (over a quarter of a year or more commonly over a year). These transactions are made by individuals, firms
and government bodies. Thus the balance of payments includes all external visible and non-visible transactions of a
country . It represents a summation of country's current demand and supply of the claims on foreign currencies and
of foreign claims on its currency[1] .[2] These transactions include payments for the
country's exports and imports ofgoods, services, financial capital, and financial transfers. It is prepared in a single
currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports
or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports
or to invest in foreign countries, are recorded as negative or deficit items.

When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For
example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have
to be counterbalanced in other ways such as by funds earned from its foreign investments, by running down
central bank reserves or by receiving loans from other countries.

While the overall BOP accounts will always balance when all types of payments are included, imbalances are
possible on individual elements of the BOP, such as the current account, the capital account excluding the central
bank's reserve account, or the sum of the two. Imbalances in the latter sum can result in surplus countries
accumulating wealth, while deficit nations become increasingly indebted. The term balance of payments often refers
to this sum: a country's balance of payments is said to be in surplus (equivalently, the balance of payments is
positive) by a specific amount if sources of funds (such as export goods sold and bonds sold) exceed uses of funds
(such as paying for imported goods and paying for foreign bonds purchased) by that amount. There is said to be a
balance of payments deficit (the balance of payments is said to be negative) if the former are less than the latter. A
BOP surplus (or deficit) is accompanied by an accumulation (or decumulation) of foreign exchange reserves by
the central bank.

Under a fixed exchange rate system, the central bank accommodates those flows by buying up any net inflow of
funds into the country or by providing foreign currency funds to the foreign exchange market to match any
international outflow of funds, thus preventing the funds flows from affecting the exchange rate between the
country's currency and other currencies. Then the net change per year in the central bank's foreign exchange reserves

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Accounting Short Note-2015

is sometimes called the balance of payments surplus or deficit. Alternatives to a fixed exchange rate system include
a managed float where some changes of exchange rates are allowed, or at the other extreme a purely floating
exchange rate (also known as a purely flexible exchange rate). With a pure float the central bank does not intervene
at all to protect or devalue its currency, allowing the rate to be set by the market, and thecentral bank's foreign
exchange reserves do not change, and the balance of payments is always zero.

Working capital :

Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a
business, organization or other entity, including governmental entity. Along with fixed assets such as plant and
equipment, working capital is considered a part of operating capital. Gross working capital equals to current assets.
Working capital is calculated as current assets minus current liabilitiesIf current assets are less than current
liabilities, an entity has a working capital deficiency, also called a working capital deficit.

A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be
converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and
that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The
management of working capital involves managing inventories, accounts receivable and payable, and cash.

Working capital is the difference between the current assets (except cash) and the current liabilities.

The basic calculation of the working capital is done on the basis of the gross current assets of the firm.

Decisions relating to working capital and short-term financing are referred to as working capital management. These
involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of
working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash
flow to satisfy both maturing short-term debt and upcoming operational expenses.

A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital,
current assets and current liabilities, in respect to each other. Working capital management ensures a company has
sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

management will use a combination of policies and techniques for the management of working capital. The policies
aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short-term
financing, such that cash flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but
reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the
investment in raw materialsand minimizes reordering costsand hence increases cash flow. Besides this, the lead
times in production should be lowered to reduce Work in Process (WIP) and similarly, the Finished Goods should be
kept on as low level as possible to avoid over productionsee Supply chain management; Just In
Time (JIT); Economic order quantity (EOQ); Economic quantity

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Accounting Short Note-2015

Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that
any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on
Capital (or vice versa); see Discounts and allowances.

Short-term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory
is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or
overdraft), or to "convert debtors to cash" through "factoring".

Debit note
A debit note or debit memorandum (memo) is a commercial document issued by a buyer to a seller as a means of
formally requesting a credit note. A seller might also issue a debit note instead of an invoice in order to adjust
upwards the amount of aninvoice already issued (as if the invoice is recorded in wrong value). Debit notes are
generally used in business-to-businesstransactions. Such transactions often involve an extension of credit, meaning
that a vendor would send a shipment of goods to a company before the goods have been paid for. Although real
goods are changing hands, until an actual invoice is issued, real moneyis not. Rather, debits and credits are being
logged in an accounting system to keep track of inventories shipped and payments owed.
A commercial instrument made and issued by the purchaser and delivered to seller giving details regarding the
amount debited from the sellers account and the reasons for the same is known as Debit Note. The document
provides information to the vendor that a debit has been made to his account in the buyers book. The reasons for
debiting the account are given as under:
When the buyers account is overcharged, he sends a debit note to seller.
When the buyer returns back the goods purchased by him, then also he delivers debit note.
When the sellers account is undercharged by the buyer, then he issues debit note.
The seller issues a credit note to buyer as an acknowledgement of the Debit Note. It is written in blue ink. In general,
Debit note reduces the receivables.

Definition of Credit Note

A memo prepared and issued by one party to the other party, containing the details of the amount credited to the
buyers account and the reasons for so, is known as Credit Note. It is issued in exchange for the Debit Note. It gives
the information to the buyer, that is account is credited in the vendors book. The note is prepared with red ink. The
reasons for issuing a credit note is as under:
When the sellers account is overcharged by the buyer, he issues credit note.
When the supplier gets back the goods sold by him to the buyer, then also credit note is issued.
A buyer can also send credit note, in case he is undercharged by the seller.
The issue of credit note, shows that the account payables are reduced. In general, it shows negative amount.
Key Differences Between Debit Note and Credit Note
The following are the differences between debit note and credit note:
1. A memo sent by one party in order to inform the other party that a debit has been made to the sellers
account, in buyers books is known as Debit Note. A commercial document which is sent by one party in
order to inform the other party that a credit has been made to buyers account, in sellers books is known
as Credit Note.
2. Debit Note is written in blue ink while Credit Note is prepared in red ink.
3. Debit Note is issued in exchange for Credit Note.
4. Debit Note represents a positive amount whereas Credit Note prepares negative amount.
5. Debit Note reduces receivables. On the other hand Credit Note reduces payables.
6. On the basis of the Debit Note, purchase return book is updated. Conversely, sales return book is updated
with the help of a Credit Note.

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Accounting Short Note-2015

Conclusion
Normally, a debit note is issued when there is a return outward (purchase return) while in case of return inward
(sales return) credit note is issued. In a transaction, when the goods are returned by the buyer to the seller, the buyer
will issue a debit note and the opposite party will issue a credit note in exchange for the debit note. Hence, they are
the two aspects of the same transaction.

STRESS TEST,

A stress test, in financial terminology, is an analysis or simulation designed to determine the ability of a
given financial instrument or financial institution to deal with an economic crisis. Instead of doing financial
projection on a "best estimate" basis, a company or its regulators may do stress testing where they look at how
robust a financial instrument is in certain crashes, a form of scenario analysis. They may test the instrument under,
for example, the following stresses: Stress testing is a simulation technique used on asset and liability portfolios to
determine their reactions to different financial situations. Stress tests are also used to gauge how certain stressors
will affect a company or industry. They are usually computer-generated simulation models that test hypothetical
scenarios. Stress testing is a useful method for determining how a portfolio will fare during a period of financial
crisis. The Monte Carlo simulation is one of the most widely used methods of stress testing.

A stress test is also used to evaluate the strength of institutions. For example, the Treasury Department could
run stress tests on banks to determine their financial condition. Banks often run these tests on themselves. Changing
factors could include interest rates, lending requirements or unemployment.

Purposes of Stress Testing

Stress testing should be embedded in enterprise wide risk management. A stress testing program as a whole
should be actionable, playing an important role in facilitating the development of risk mitigation or contingency
plans across a range of stressed conditions. It should feed into the institutions decision making process, including
setting the institutions risk appetite, setting exposure limits, and evaluating strategic choices in longer term
business planning.
An institutions stress testing program should serve the following purposes:

1. Risk identification and control Stress testing should be included in an institutions risk management
activities at various levels, for example, ranging from risk mitigation policies at a detailed or portfolio level
to adjusting the institutions business strategy. In particular, it should be used to address institution-wide
risks, and consider the concentrations and interactions between risks in stress environments that might
otherwise be overlooked.
2. Providing a complementary risk perspective to other risk management tools Stress tests should
complement risk quantification methodologies that are based on complex, quantitative models using
backward looking data and estimated statistical relationships. In particular, stress testing outcomes for a

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Accounting Short Note-2015

particular portfolio can provide insights about the validity of statistical models at high confidence intervals,
for example those used to determine VaR.

As stress testing allows for the simulation of shocks which have not previously occurred, it should be used
to assess the robustness of models to possible changes in the economic and financial environment. Stress
tests should help to detect vulnerabilities such as unidentified risk concentrations or potential interactions
between types of risk that could threaten the viability of the institution, but may be concealed when
relying purely on statistical risk management tools based on historical data.
Stress testing can also be used to assess the impacts of customer behaviour arising from options embedded
in certain products particularly where the impact is not easily modelled under extreme events.

3. Supporting capital management Stress testing should form an integral part of institutions internal
capital management where rigorous, forward-looking stress testing can identify severe events, including a
series of compounding events, or changes in market conditions that could adversely impact the institution.
4. Improving liquidity management Stress testing should be a central tool in identifying, measuring and
controlling funding liquidity risks, in particular for assessing the institutions liquidity profile and the
adequacy of liquidity buffers in case of both institution-specific and market-wide stress events.

CHECK KITING

Check kiting is a form of check fraud, involving taking advantage of the float to make use of non-existent funds in
a checking or other bank account. In this way, instead of being used as a negotiable instrument, checks are misused
as a form of unauthorized credit.

Kiting is commonly defined as intentionally writing a check for a value greater than the account balance from an
account in one bank, then writing a check from another account in another bank, also with non-sufficient funds, with
the second check serving to cover the non-existent funds from the first account. The purpose of check kiting is to
falsely inflate the balance of a checking account in order to allow written checks to clear that would otherwise
bounce If the account is not planned to be replenished, then the fraud is colloquially known as paper hanging.[ If
writing a check with insufficient funds is done with the expectation they will be covered by payday in effect
a payday loan it is calledplaying the float.

Some forms of check fraud involve the use of a second bank or a third party, often a place of retail, in order to delay
the absence of funds in a transactional account on the day the check is due to clear at the bank. Such acts are
frequently committed by bankrupt or temporarily unemployed individuals or small businesses seeking emergency
loans, by start-up businesses or other struggling businesses seeking interest-free financing while intending to make
good on their balances, or by pathological gamblers who have the expectation of depositing funds upon winning. It
has also been used by those who have some genuine funds in interest-bearing accounts, but who artificially inflate
their balances in order to increase the interest paid by their banks. In recent years, criminals have started taking
advantage of the check float to pass fraud checks through solicited users of online auctions. [5]

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Accounting Short Note-2015

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