GLOSSARY OF ACCOUNTING TERMS - PART 3

Debentures: Debentures are a type of security issued by a company & are in the form of borrowings made by the company.

Debtor: Debtor is a party from whom amount is receivable by the business for the goods or services sold / supplied to it.

Debt Equity Ratio: Debt Equity ratio measures the ratio of the Borrowed Funds (Secured + Unsecured) to the Shareholders’ Funds (Share capital + Reserves & Surplus) of a Company. This indicates how much is a company dependent on borrowed funds as compared to its own funds. A Debt Equity Ratio of 2:1 or lesser is considered to be ideal for a company.

Debt service coverage ratio: Debt service coverage ratio (DSCR) measures firm's available cash flow to pay current debt obligations. The DSCR shows whether a company has enough income to pay its debts & interest. DSCR can be computed by the following formula:

(Profit after tax + Depreciation + Interest on Loan) / (Interest on loan + Loan repayment during the year).

Deferred Tax: Deferred Tax indicates the tax that has been deferred to a different time period other than the current accounting period due to ‘timing differences’ arising on the computation of taxable profit as compared with the accounting profit. Such timing differences may result in a ‘Deferred Tax Asset’ or a ‘Deferred Tax Liability’.

Del-credere commission: Del-credere commission is an additional commission paid by the consignor to the consignee for bearing the additional responsibility of recovering the dues from the debtors and for bearing the loss that may arise on account of bad debts.

De-merger: The splitting up of a Company into more than one companies based upon different business segments, products or areas of operation is called a De-merger.

Departmental accounts: Departmental Accounts involves determining the financial performance of each department, division or product of a company by preparing a separate income statement for each department, division or product. This is done by splitting up and allocating the total income & expenditure of the business and allocating it in an appropriate manner to each department, division or product. This is also known as Segment Reporting.

Depreciation: Depreciation indicates the reduction in the value of an asset (tangible or intangible) due to passage of time or use.

Direct Taxes: Direct taxes are taxes which are borne by the persons on whom they are levied. In other words, these are taxes whose incidence and impact are borne by the same person. Eg. Income Tax.

Disclaimer of opinion: A Disclaimer of Opinion is an audit report issued by an auditor when the auditor does not have sufficient data or financial information as to form an opinion about the financial statements of an auditee.

Dissolution: Dissolution refers to closure or winding up of the business of a partnership firm or a LLP. When a dissolution occurs, all liabilities of the firm are paid out or are taken over by the partners and all assets are realised or sold or are taken over by the partners.

Distribution Expenses: Distribution expenses are expenses incurred for transporting, storing, facilitating or ensuring that goods reach the place of the customers from the place of their manufacture. Eg. Delivery expenses, godown expenses.

Dividend: Dividend is the distribution of the earnings of a Company to its shareholders.

Earnings per share (EPS): Earnings per share is calculated by dividing the profit available to the equity shareholders by the weighted number of equity shares. EPS indicates the amount of profit earned by the company per equity share. Computation of EPS is defined as per Accounting Standard 20.

Earnings before interest, depreciation, tax & amortization (EBIDTA): The acronym EBIDTA stands for earnings before interest, taxes, depreciation, and amortization. EBIDTA measures a company’s profitability from operations.

Earnings or net profit before taxes (EBIT): EBIT indicates the net profit earned by a business before payment of interest and income tax.

Earnings or net profit before taxes (EBT/NPBT): EBIT or NPBT indicates the net profit earned by a business before payment of income tax.

Employee Stock Options Plan (ESOP): The term employee stock option plan (ESOP) refers to a type of compensation granted by companies to their employees and executives. ESOPs give the employee the right to buy the company's shares at a specified price within a specified time period.

Endorsement: Endorsement involves transfer of a document, or the rights in a document from one person to another. Such document could be a negotiable instrument like a Bill of Exchange or Bearer Cheque. It could also be a transport document indicating delivery of goods like a Bill of Lading or a Lorry Receipt.

Equated monthly instalment (EMI): EMI indicates the monthly (or periodical) instalment that is paid as part of repayment of a loan. An EMI will consist of two components; Principal and Interest.

Equity: Equity indicates the ownership of the shareholders in a company, represented through shares. It also represents the amount of money that would be returned to a company's shareholders if all of the assets were liquidated and all of the company's debt was paid off in the case of liquidation.

Finished goods: Finished goods are the goods manufactured by an enterprise by processing raw materials through a manufacturing process.

First in first out (FIFO): FIFO is a method of valuation of inventory (stock) where it is assumed that the goods which were purchased first are sold / consumed first. Due to this calculation, the stock at the end of the year represents the latest purchase quantity and price.

Fixed Capital: Fixed Capital represents the initial capital brought in by a partner at the time of formation of the firm or admission of partner. Any further change in the capital (due to drawings, net profit or any other adjustment) is made through the Current Account of the partner.

Fluctuating Capital: Fluctuating Capital is a system where all adjustments to a partner’s capital account (due to drawings, net profit or any other adjustment) is made through the capital account only. In this system, no current account is maintained.

Fixed cost: Fixed cost is a cost which remains constant irrespective of the change in the level of output. As the level of the output increases, the total fixed cost remains constant, but the fixed cost per unit decreases.