Learn CBSE Accountancy Index Terms for Class 11, Part 2, Chapter 1 Financial Statements I
1. Stakeholders – Stakeholders can be referred to as a person, organisation, or group having an active interest in the functioning of an organisation. Stakeholders can affect or are affected by the changes in the business.
Stakeholders are of two types, internal and external. Internal stakeholders are referred to as those persons who have an interest in the company due to the presence of a direct relationship with the company, such as through ownership, employment, or an investor (through investment).
External stakeholders are those persons who, although not directly involved with a company but are impacted in some way through the actions and business outcomes. Creditors, suppliers, and public groups are all considered examples of external stakeholders.
2. Financial Statements – Financial statements present an actual view of the financial performance of an organisation at the end of a financial year. It represents a formal record of financial transactions taking place in an organisation. These statements help the users of the information in determining the financial position, liquidity, and performance of the organisation.
Financial statements reflect the impact of the financial effects of the transactions on the organisation. The preparation of financial statements is done by both profit and non-profit organisations. It forms a crucial part of the annual report of any organisation.
Financial statements are used by different stakeholders of an organisation which includes shareholders, staff, customers, investors, suppliers, stock exchanges, government authority, and other related stakeholders.
3. Trading Account – A trading account is used to determine a business’s gross profit or loss that results from trading activities. Trading activities are mostly related to the buying and selling activities involved in a business. A trading account is useful for businesses that are dealing in the trading business. This account helps them to easily determine the overall gross profit or gross loss of the business. The amount thus determined is an indicator of the efficiency of the business in buying and selling.
4. Profit and Loss Account – The profit and loss account shows the net profit and net loss of the business for the accounting period. This account is prepared in order to determine the net profit or net loss that occurs during an accounting period for a business concern.
Profit and loss accounts get initiated by entering the gross loss on the debit side or gross profit on the credit side. This value is obtained from the balance which is carried down from the trading account.
A business will incur many other expenses in addition to direct expenses. These expenses are deducted from the profit or are added to a gross loss and the resulting value thus obtained will be net profit or a net loss.
5. Balance Sheet – A balance sheet is known as a statement of financial position as it shows the position of assets, liabilities, and equity at the end of an accounting period. The net worth of a business can be determined by deducting the liabilities from the assets.
Suppose the users of financial information are looking for information regarding the financial position of the company. In that case, a balance sheet is the most appropriate statement which will present the necessary information.
In other words, the balance sheet is a statement that shows the financial position of the business. It records the assets and liabilities of the business at the end of the accounting period after the preparation of trading and profit and loss accounts.
6. Opening Stock – Opening stock is the amount and value of materials that a company has available for sale or use at the beginning of an accounting period. The closing stock can be in various forms such as raw materials, work-in-process goods (WIP), or finished goods.
7. Wages – The hourly compensation paid to the employees for their work during a period of time in an organisation is called wages. The blue-collar workers are paid for the total number of hours that they work. These types of employees usually have a time card or time sheet to track their work on a weekly basis.
8. Carriage Inward or Freight Inwards – Carriage inwards is the shipping and handling costs incurred by a company that is receiving goods from suppliers. Carriage inwards also termed as transportation inwards or freight inwards is treated as a direct expense and is always reflected on the debit.
9. Salaries – Salaries are paid to employees who are appointed to professional or management positions in the organisation. Salaries are fixed amount per pay period; the salaried employee receives a fixed remuneration per pay period by totalling the fixed remuneration over a financial year is called salaries.
10. Closing Stock – The closing stock is the inventory that is still in the business waiting to be sold for a given period. The opening stock for the next reporting period is the same as the closing stock from the immediately preceding period.
11. Cost of Goods Sold – The (COGS) cost of goods sold characterises all expenses a private company experiences to make an offer of its goods and services. Instances of cost of goods sold are overhead, materials, storage, the wholesale price of products resold elsewhere, and direct labour.
12. Direct Expenses – Direct expenses are the expenses incurred directly by the organisation with the changes in the volume of the cost object. A cost object is any item that an organisation is measuring its expenses from. For example customers, employees, sales region, services, product lines, and products.
13. Operating Profit/EBIT – Operating profit is the benefit or profit acquired from the standard business exercises of the undertaking. After the organisation arrives at the gross profit while working costs (backhanded costs) like devaluation, compensation, and salaries to employees, rent, telephone expenses, and electricity bills, are deducted from it, then, at that point, operating profit emerges. It is likewise named earnings before interest and taxes (EBIT) when there is no non-operating income.
14. Goodwill – Goodwill is an intangible asset associated with the purchase of one company by another. Specifically, goodwill is recorded in a situation in which the purchase price is higher than the sum of the fair value of all visible solid assets and intangible assets purchased in the acquisition and the liabilities assumed in the process. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent some examples of goodwill.
15. Carriage Outward – Carriage outward is the dealer’s expense of conveying merchandise to the purchaser. It is connected with carriage inward and sales is the transportation cost related to the acquisition of products. The trading account incorporates all of the costs connected with the production. All indirect costs are recorded in the profit and loss account.
16. Return Inwards – Returns inwards are goods and products that are returned to the selling business by the customer, such as for warranty claims or outright returns of goods for credit purchase.
17. Purchase Return – Returns outwards are goods or products that are returned by the customer or business to the supplier.
18. Cash – Cash and Cash equivalents are related to the detail on the balance sheet that summarises the value of a business’s assets that are cash or can be transformed into cash instantly. The cash equivalents consist of marketable securities, bank accounts, short-term government bonds, commercial paper, and Treasury bills with a maturity date of 3 months or less. Marketable bonds and money market holdings are estimated cash equivalents as they are liquid and not directed to substantial variations in the state.
19. Factory Expenses – Factory expenses are the expenses borne by the business to produce the predetermined goods and services that are meant to be sold to their customers in the normal course of business. These costs include manufacturing overheads, direct labour, and direct production costs.
20. Gross Profit – Gross margin, or gross profit margin or GP margin is the action that shows how well an organisation dealt with its significant business exercises (in regards to material, work, and direct costs) so the association procures a benefit. The gross margin depends on the gross profit made by the organisation over net sales.
With the assistance of gross profit margin, the organisation is equipped for contrasting the current gross benefit and benefits procured previously. Alongside that, projection is additionally finished by the organisation with respect to its future benefits. After the assurance of GP margin, the business can likewise decrease or control different expenses, so the margin might increase in the future.
21. Income Tax – Income tax is defined as a direct tax that is imposed by the government on the income or profits earned by their citizens. This tax law says that every taxpayer has to file their income tax returns for every financial year, which will help to determine their total tax obligations. It is one of the major sources of revenue for governments around the world. The income tax depends on specific tax brackets that are regulated by the government of a particular country. It is based on the income that a person will make throughout a financial year.
This tax helps the government to run the country and engage in expenditure for developmental projects. It is levied on the incomes of an earning individual, a salaried individual, or a business. These earnings can come from multiple sources like wages and salaries, interest, rent, royalties, product sales, etc. It is also paid on the earnings from interest, employment, dividends, self-employment, or royalty.
22. Interest on Drawings – Interest on drawings is revenue to the business organisation and hence the account is debited as it is payable to its partners. Interest is charged on the withdrawn money made by the partners or the goods taken by the partners for their personal use. Interest on drawings is debited in the capital account.
23. Net Profit – Net profit is the excess (positive worth) that stays with the organisation subsequent to deducting all costs, taxes, and interest. Following this, an organisation arrives at the operating profit; then, at that point, the taxes and interest on long-term debt are deducted from it, which brings about net profit. It reveals the current benefit position of the organisation. Alongside that, it mirrors the achievement and insufficiency of the business entity. Net profits are likewise alluded to as earnings after taxes (EAT).
24. Order of Performance and Liquidity – Order of performance and liquidity in accounting refers to the arrangement of assets and liabilities in a balance sheet based on their liquidity. The assets are placed according to the ease with which they can be converted into cash while liabilities are placed according to the degree of urgency in making the payment.
Therefore, current assets like cash and cash equivalents are placed first in assets followed by fixed assets while current liabilities like a bank overdraft and bills payable are placed first followed by loans, mortgages, etc.
25. Grouping – In a balance sheet, assets and liabilities should be properly grouped and classified under appropriate headings. The individual balance of each debtor and creditors account need not be shown. Debtors and creditors should be shown in total. The grouping together of different assets will make the balance sheet misleading. Hence, it can be said that grouping means putting together items of similar nature under a common heading.
26. Marshalling – The term marshalling means the order in which assets and liabilities are stated on the balance sheet as the balance sheet exhibits the financial position of concern even to a non-technical observer. It is of great importance that the different assets and liabilities should be arranged in the balance sheet on certain principles.
27. Return Outward – Goods purchased by businesses are returned to the suppliers. It has a credit balance. Deducted from purchases in the trading account. A debit note is prepared by the buyer and reduces the payment made to the creditors. It is also known as purchase returns.
28. Trade Expenses – All the expenses that are incurred from the time of purchasing raw materials to the expenses incurred brought about by the business for the sale of their products and services are termed as trade expenses. These include wages, salaries, manufacturing expenses, and carriage inward expenses.
29. Freight – Freight is the transportation cost that is related to the delivery of goods from the manufacturer to the user. For accounting purposes, the user adds these costs to the cost of goods received.
30. Gross Loss – Gross loss in accounts is shown under the trading account. A trading account is used to determine a business’s gross profit or loss that results from trading activities. Trading activities are mostly related to the buying and selling activities involved in a business. A trading account is useful for businesses that are dealing in the trading business. This account helps them to easily determine the overall gross profit or gross loss of the business. The amount thus determined is an indicator of the efficiency of the business in buying and selling.
31. Interest on Capital – Every business owner will be looking out for getting a return on the money invested in the business in the form of a fixed rate interest. This is known as the interest on capital.
In other words, interest on capital is the interest paid to owners for providing a firm with the required capital to start a business. It is similar to obtaining a loan from any financial institution.
The partners are paid interest on the capital that remains outstanding. The maximum rate of interest that can be paid to the owners is 12% as per the Income Tax Act u/s 40(b). If a partner introduces any further capital to the business, then the additional capital is also taken into account for providing interest.
32. Net Loss – A net loss occurs when the net expenses that are depreciation, taxes, interests, and other expenses are more than the revenue earned during an accounting period. A net loss is reported on the income statement as a significant net loss.
33. Sales Return – A sales return refers to items or goods that are returned by a customer to the business. A sales return book is a book in accounting that records all those transactions related to the returns of goods and items by the customer which were earlier sold to them on credit.
34. Opening Entries – Opening entry is referred to as the first entry that is recorded or which is brought forward from a previous accounting period to the new accounting period. In an ongoing business, the closing balance of the previous accounting period serves as an opening balance for the current accounting period.
We hope that the offered Accountancy Index Terms for Class 11 with respect to Part 2, Chapter 1: Financial Statements I, will help you.
Related Links:
- Class 11 Accountancy Terms Part I – Chapter 1: Introduction to Accounting
- Class 11 Accountancy Terms Part I – Chapter 2: Theory Base of Accounting
- Class 11 Accountancy Terms Part I – Chapter 3: Recording of transactions – I
- Class 11 Accountancy Terms Part I – Chapter 4: Recording of Transactions – II
- Class 11 Accountancy Terms Part I – Chapter 5: Bank Reconciliation Statement
- Class 11 Accountancy Terms Part I – Chapter 6: Trial Balance and Rectification of Errors
- Class 11 Accountancy Terms Part I – Chapter 7: Depreciations, Provisions, and Reserves
- Class 11 Accountancy Terms Part II – Chapter 2: Financial Statements II
- Class 11 Accountancy Terms Part II – Chapter 3: Accounts from Incomplete Records
- Class 11 Accountancy Terms Part II – Chapter 4: Applications of Computers in Accounting
