GLOSSARY OF ACCOUNTING TERMS - PART 4

Good & Services Tax (GST): Goods & Services Tax is an indirect tax levied on the supply of goods and service within India. This tax has been introduced from 1st July 2017.

Goodwill: Goodwill is an intangible asset associated with the purchase of one company by another. It represents the excess of the consideration paid for the company over the value of the net assets of that company.

Gross Profit: Gross profit is the profit a company makes after deducting the direct costs associated with making its products, or providing its services. Gross profit will appear on a company's income statement and can be calculated by subtracting the cost of goods sold (COGS) from the sales.

Gross Profit Ratio: Gross Profit ratio indicates the ratio of the gross profit to the sales. It is calculated as percentage of gross profit to the net sales. ie. (Gross Profit / Net Sales) x 100.

Hire Purchase: Hire purchase is an arrangement for buying expensive consumer goods, where the buyer makes an initial down payment and pays the balance plus interest in instalments. The seller continues to remain the legal owner of the goods. The ownership of the goods is transferred to the buyer on the payment of the last instalment.

Hire vendor: Hire vendor is a person who sells goods on hire purchase system.

Hypothecation: Hypothecation occurs when an enterprise pledges an asset as security against a loan. The lender can seize the asset and recover the outstanding loan due if the enterprise fails to repay the loan.

International Financial Reporting Standards (IFRS): IFRS are a set of accounting standards, issued by the International Accounting Standards Board (IASB), for the financial statements of public companies to make them consistent, transparent, and easily comparable around the world. India has also issued accounting standards called IndAS, applicable to large companies, which are based on IFRS.

Impairment: Impairment is the permanent reduction in the value of a tangible or intangible asset.

Income received in advance: Income received in advance implies receipt of money against an income which has not become due or receivable as on date. Such receipt is treated as a liability of the business. Eg. Rent receivable for April has been received in March.

Income Tax: Income tax is a direct tax levied on persons on income arising in India as per the Income Tax Act, 1961.

Indirect Tax: An indirect tax is collected by one entity in the supply chain (usually a producer or retailer) and paid to the government, but it is passed on to the consumer as part of the purchase price of a good or service. The consumer is ultimately paying the tax by paying more for the product. Eg. GST, Customs Duty.

Initial Public Offering (IPO): An Initial Public Offering refers to an offer by a company to the public to purchase a specified number of shares in the company. An IPO is a method of raising capital by the company.

Instalment transaction: Instalment system is an arrangement for buying expensive consumer goods, where the buyer makes an initial down payment and pays the balance plus interest in instalments. The ownership of the goods is transferred to the buyer on the payment of the first instalment.

Insurance claim: An insurance claim is a compensation paid by the insurance company to an insured party for the loss suffered by the party to its assets due to an unforeseen event.

Intangible Asset: An intangible asset is an asset that is not physical in nature. They derive their value from certain internal & external factors. Goodwill, brand recognition, website, patents, trademarks and copyrights are examples of intangible assets.

Interest: Interest is the price paid for borrowing money.

Intrinsic Value: Intrinsic value refers to the valuation of the net assets of a company. This valuation may be done by considering the book value or the fair value of the assets & liabilities of the company.

Inventory: The term inventory refers to the raw materials used in production or rendering of services as well as the finished goods which are available for sale.

Investments: An investment is an asset acquired with the goal of generating income or appreciation of wealth. Eg. Investment could be in shares, securities, immovable property, jewellery, paintings, business ventures.

Limited Liability Partnership (LLP): A Limited Liability Partnership is a form of organization, in the nature of a partnership with the partners having limited liability, as formed under the Limited Liability Partnership Act, 2008.

Liquidation: Liquidation is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent. As company operations end, the assets are sold and the money available is used to pay creditors and shareholders, based on the priority of their claims.

Manufacturing account: Manufacturing account is a Revenue account in which all manufacturing expenses and incomes are recorded. The balancing amount in the manufacturing account is the ‘Cost of Production’ which is transferred to the Trading Account.

Manufacturing expense: Any expense incurred for the purpose of, or related to the manufacturing of a product is called as a manufacturing expense. Eg. Raw material consumed, factory wages, depreciation of machinery.

Marginal cost: Marginal cost is the additional cost that is incurred when the level of output is increased by 1 unit. Marginal cost is the variable cost incurred for manufacturing 1 unit.

Marginal costing: Marginal costing is a technique of costing used for cost analysis and forecasting by classifying all costs into their fixed and variable components.

Memorandum / Proforma account: A Memorandum or Proforma account is a rough working prepared outside the books of accounts for a specific purpose. This is not a part of the books of accounts or double entry system of accounting.

Merger: A merger is an agreement by which two or more existing companies combine into one new company. The merging companies will cease to exist and new merged company will be incorporated to take over the business, assets & liabilities of the merging companies.

Mutual funds: A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like shares, bonds and other assets. Mutual funds are operated by professional fund managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.