GLOSSARY OF ACCOUNTING TERMS - Part 1

GLOSSARY OF ACCOUNTING TERMS

Accounting: Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analysing and reporting these transactions to the management, owners, government and other stakeholders.

Accounting method: An accounting method refers to the rules a company follows in reporting incomes and expenses. The two primary methods of accounting are accrual accounting (generally used by companies) and cash accounting (generally used by individuals). Cash Accounting reports incomes and expenses on actual receipt or payment basis. Accrual accounting reports them as they are earned or incurred.

Accounting Policies: Accounting policies are the specific principles and procedures implemented by an enterprise to prepare its financial statements. Eg. Use of WDV method to compute depreciation or use of FIFO method to value inventory.

Accounting Standards: Accounting standards are the rules and guidelines that companies must follow when maintaining & reporting financial data. In India, accounting standards are issued by the Institute of Chartered Accountants of India (ICAI).

Accounting Ratios: Accounting Ratios are ratios used to define or understand the relationship between 2 or more financial data points. Eg. Net Profit ratio defines the relationship between the net profit and sales.

Accrual: Accrual accounting is an accounting method where incomes & expenses are recorded when they are earned or incurred. This allows a company to record income when it has arisen, irrespective of when money is actually received or record expenses when they arise irrespective of when the payment for them has been made.

Accrued Income: Accrued income means income which has become due or receivable, but has not been received as on date. Such accrued income is treated as an asset of the business.

Accumulated Depreciation: Accumulated depreciation is the cumulative depreciation charged on an asset for the entire period from the date it was out to use to the current date. Eg. A Machine is purchased on 1/4/2015. The accumulated depreciation as on 31/03/2022 would be the total depreciation provided from 1/4/2015 to 31/03/2022.

Abnormal gain: If normal loss of output is less than expected, the difference in quantity is called abnormal gain. Abnormal gain is valued at cost per unit.

Abnormal loss: If actual output in a manufacturing process is less than expected, the differential quantity is known as abnormal loss. Abnormal loss is valued at cost per unit.

Absorption of companies: Absorption is a process where one company takes over another company / companies resulting in the merger of the companies into a single company.

Admission of partner: Admission of a partner is a process where a new partner joins a partnership firm.

Advance Tax: Advance tax is the amount of income tax payable by an assessee in specified instalments & on specific dates during an assessment year. In India, advance tax is to be paid in 4 instalments within 15th June, 15th September, 15th December & 15th March each year.

Adverse audit report: An adverse audit report is a report issued by an auditor in cases where the books of accounts of a company are not maintained as per the accounting principles and standards and the financial statements of the company do not reflect a fair position of its assets & liabilities.

Administrative Expenses: Administrative expenses are those expenses which an organization incurs that are not directly tied to a specific core function such as manufacturing, production, or sales. These are general expenses incurred for the supporting business functions or the smooth functioning of the business. Eg. Salaries, Office Rent, Printing & Stationery.

Amalgamation: An amalgamation is a combination of two or more companies into a new entity. Amalgamation is distinct from a merger because neither company involved survives as a legal entity. Instead, a completely new entity is formed having the combined assets and liabilities of the amalgamating companies.

Amortisation: Amortisation means writing down or reducing the value of an asset.

Average Clause: Average clause is a condition applied for calculating an insurance claim in case an asset is under-insured ie. The value of insurance policy taken is less than the value of the asset insured. In such a case, in an event of a loss, only the proportionate claim is paid by the insurance company by applying the following formula:

(Loss suffered x Value of Insurance Policy) / Value of Asset on date of the loss

Audit: Audit is a process where an auditor conducts verification of books of accounts of an entity and submits his report, with an objective to detect errors, to ensure that books of accounts are maintained as per the prescribed accounting standards and policies and to confirm whether the financial statements show a true & fair view of the financial affairs of the entity.

Audit programme: Audit programme is a detailed plan prepared by the auditor before conducting an audit.

Audit working papers: Audit working papers refer to the detailed audit plan, audit working, observations, documentation & findings recorded by an auditor during the course of an audit.