Demystiyfing Accounting Jargons

8/6/2019 Demystiyfing Accounting Jargons

1/29

DEMYSTIYFING ACCOUNTINGDEMYSTIYFING ACCOUNTINGJARGONSJARGONS

By:-Deepali Upadhyay

Roll No.:- 10


2/29

ASSETSASSETS

An asset is a resource legally owned by anenterprise as a result of past events and fromwhich economic benefits are expected to flow to

the enterprise.

Example:- cash, land, equipments, inventories.

Assets = Liabilities + Equity


3/29

Types of assets:-y

CURR E NT ASSETSThese are those assets that are expected to be used(sold or consumed) within a year or within anoperating cycle (whichever is longer).

Example:- cash, short-term investments,receivables, inventory.


4/29

y FIX E D ASSETSFixed asset, also known as a non-current asset or

as property, plant and equipment (PP&E), is aterm used in accounting for assets and property

which cannot easily be converted into cash.

Examples:- land, buildings, machinery.


5/29

y TO XI C ASSETS

Toxic asset is a popular term for certain financialassets whose value has fallen significantly andfor which there is no longer a functioningmarket, so that such asset cannot be sold at a

price satisfactory to the holder.

Example:- mortgage-backed security.


6/29

y FI C T I T I O US ASSETS

Fictitious asset is an asset created by anaccounting entry that has no tangible existenceor realizable value but represents actual cashexpenditure.

The purpose of creating a fictitious asset is toaccount for expenses that cannot be placedunder any normal account heading.

Example:- expenses incurred in starting a business.


7/29

L I ABI L I TYL I ABI L I TY

A liability is defined as an obligation of an entityarising from past transactions or events, thesettlement of which may result in the transfer or

use of assets, provision of services or other yielding of economic benefits in the future.

Examples:- money owing on a loan, money owingon a mortgage.


8/29

EQ U I TYEQ U I TY

Equity is defined as the amount of the fundscontributed by the owners (the stockholders)

plus the retained earnings (or losses).

Examples :- a car or house with no outstandingdebt is considered the owner's equity because heor she can readily sell the item for cash.


9/29

DE BTDE BT--TOTO --EQ U I TY R AT I OEQ U I TY R AT I O

The debt-to-equity ratio (D/E) is a financial ratioindicating the relative proportion of shareholders equity and debt used to finance acompanys assets.

Closely related to leveraging, the ratio is alsoknown as Risk, Gearing or Leverage.

D/E = Debt(liabilities)/equityIn terms of assets or equity, D/E ratio can be

formulated as

D/E = D /(A D) = (A E) / E.


10/29

ACC O UN TS PAYA BL ESACC O UN TS PAYA BL ES

Accounts payable is a file or account that recordsamounts that a person or company owes tosuppliers, but has not paid yet (a form of debt).

When an invoice is received, it is added to thefile, and then removed when it is paid.

Example:- Accounts payable are ordinary billsfrom the electric company, telephone company,newspaper subscription.


11/29

ACC O UN TS R E C E IV ABL ESACC O UN TS R E C E IV ABL ES

Accounts receivables are the amounts owed to you by your customers.

Example:- A customer who purchases your product on credit would be listed in your accounts receivable ledger.


12/29

DE BE NT UR ESDE BE NT UR ES

Debenture is a certificate that certifies an amountof money owed to someone.

Types of debentures:-y Convertible Debentures.y Non-Convertible Debentures.


13/29

C O NV E R T I BL E DE BE NT UR ESC O NV E R T I BL E DE BE NT UR ES

Convertible Debentures can be converted intoequity shares of the issuing company after a

predetermined period of time.

NO N-C O NV E R T I BL E DE BE NT UR ES Non-Convertible Debentures cannot be converted

into equity shares of the liable company.


14/29

BO ND SBO ND S

A bond is a debt security, in which the authorizedissuer owes the holders a debt and depending onthe terms of the bond, is obliged to pay interest

and/or repay the principal at a later date.

A bond is a formal contract to repay borrowedmoney with interest at fixed intervals.


15/29

DE PR E C I AT I O NDE PR E C I AT I O N

A non-cash expense that reduces the value of anasset as a result of wear and tear, age or obsolescence. Most assets lose their value over

time (i.e. they depreciate), and must be replacedonce the end of their useful life is reached.

Methods for Calculating Depreciationy Straight line methody Declining-balance method (or Reducing balance

method)


16/29

StraightStraight- -line methodline method

Straight-line depreciation is the simplest and most-often-used technique, in which the companyestimates the scrap value (or residual value) of theasset at the end of the period during which it will be

used to generate revenues (useful life) and willexpense a portion of original cost in equal incrementsover that period.


17/29

DecliningDeclining- -balance method (or Reducingbalance method (or Reducing

balance method)balance method)

The declining balance method assumes aThe declining balance method assumes aconstant depreciation rate per year. Theconstant depreciation rate per year. Thedepreciation charge in the first year of andepreciation charge in the first year of anassets life is higher and it decreases in theassets life is higher and it decreases in thesubsequent years.subsequent years.


18/29

AM O R T IZ AT I O NAM O R T IZ AT I O N

Amortization is charging off a part of the cost of an intangible asset in the income statement.


19/29

E arnings before interest, taxes,E arnings before interest, taxes,depreciation and amortizationdepreciation and amortization

EBITDA stands for Earnings Before Interest,Taxes, Depreciation and Amortization.

It measures cash earnings without accrualaccounting, canceling tax-jurisdiction effects,and canceling the effects of different capitalstructures.

EBITDA Margin refers to EBITDA divided bytotal revenue. EBITDA margin measures theextent to which cash operating expenses use uprevenue.


20/29

O P E R AT I NG L E V E R AG EO P E R AT I NG L E V E R AG E

Operating leverage is the percentage of fixed costsin a companys cost structure.

Operating leverage measures a firm's fixed versusvariable costs. The greater proportion of fixedcosts, the greater the operating leverage.


21/29

UN EA RN E D R E V E NU EUN EA RN E D R E V E NU E

Unearned revenue is the payment received beforea good is sold or a service is provided.

Example:- prepayment for a lease or asset.


22/29

P/ E R AT I O .P/ E R AT I O .

The P/E ratio (priceThe P/E ratio (price- -toto--earnings ratio) of a stock isearnings ratio) of a stock isa measure of the price paid for a share relative toa measure of the price paid for a share relative tothe annual net income or profit earned by the firmthe annual net income or profit earned by the firm

per share. per share.


23/29

SWEATSWEAT EQ UT I YEQ UT I Y

Sweat equity refers to equity shares given to thecompanys employees on favorable terms, inrecognition of their work.

Sweat equity usually takes the form of givingoptions to employees to buy shares of thecompany, so they become part owners and

participate in the profits, apart from earning

salary.


24/29

FI NANC I A L L E V E R AG EFI NANC I A L L E V E R AG E

Financial leverage refers to the use of debt toacquire additional assets. Financial leverage isalso known as trading on equity.

It is the process by which a business person,entrepreneur or investor is able to greatlyincrease the return on an investment through theuse of borrowed money.


25/29

BR EAK BR EAK --E V E N P O I NTE V E N P O I NT

The break-even point (BEP) is the point at whichcost or expenses and revenue are equal.

Break even point analyzes which quantity or amount of sale of products will be most

profitable to the business.


26/29

BOOK V A L UEBOOK V A L UE

Book value or carrying value is the value of anasset as it appears in the balance sheet account

balance.

For assets, the value is based on the original costof the asset less any depreciation, amortizationor impairment costs made against the asset.

Traditionally, a companys book value is its totalassets minus intangible assets and liabilities.


27/29

FIX E D C OSTFIX E D C OST

Fixed costs are defined as expenses that do notchange as a function of the activity of a

business, within the relevant period.

Example:- a retailer must pay rent and utility billsirrespective of sales.


28/29

V AR I ABL E C OSTV AR I ABL E C OST

V ariable costs are expenses that change in proportion to the activity of a business.

V ariable costs is the sum of marginal costs over allunits produced.

Example:- fuel of an airline. This cost changeswith the number of flights and how long thetrips are.


29/29

THANK YOU

Demystiyfing Accounting Jargons

Documents

Transcript of Demystiyfing Accounting Jargons