MEANING OF FINANCE:
DEFINITION OF BUSINESS FINANCE: According to the Wheeler,
“Business finance is that business activity which concerns with the acquisition and conversation of capital funds in meeting financial needs and overall objectives of a business enterprise”
Generally accepted accounting principles (GAAP) are the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice.
What are the various streams of accounting?
1) Financial Accounting: is the process in which business transactions are recorded systematically in the various books of accounts maintained by the organization in order to prepare financial statements. Theses financial statements are basically of two types: First is Profitability Statement or Profit and Loss Account and second is Balance Sheet.
2) Cost Accounting: is the process of classifying and recording of expenditure incurred during the operations of the organization in a systematic way, in order to ascertain the cost of a cost center with the intention to control the cost.
3) Management Accounting: is the process of analysis, interpretation and presentation of accounting information collected with the help of financial accounting and cost accounting, in order to assist management in the process of decision making, creation of policy and day to day operation of an organization. Thus, it is clear from the above that the management accounting is based on financial accounting and cost accounting.
4) Governmental Accounting, also known as public accounting or federal accounting, refers to the type of accounting information system used in the public sector. This is a slight deviation from the financial accounting system used in the private sector. The need to have a separate accounting system for the public sector arises because of the different aims and objectives of the state owned and privately owned institutions. Governmental accounting ensures the financial position and performance of the public sector institutions are set in budgetary context since financial constraints are often a major concern of many governments. Separate rules are followed in many jurisdictions to account for the transactions and events of public entities.
5) Tax Accounting refers to accounting for the tax related matters. It is governed by the tax rules prescribed by the tax laws of a jurisdiction. Often these rules are different from the rules that govern the preparation of financial statements for public use (i.e. GAAP). Tax accountants therefore adjust the financial statements prepared under financial accounting principles to account for the differences with rules prescribed by the tax laws. Information is then used by tax professionals to estimate tax liability of a company and for tax planning purposes.
6) Forensic Accounting is the use of accounting, auditing and investigative techniques in cases of litigation or disputes. Forensic accountants act as expert witnesses in courts of law in civil and criminal disputes that require an assessment of the financial effects of a loss or the detection of a financial fraud. Common litigations where forensic accountants are hired include insurance claims, personal injury claims, suspected fraud and claims of professional negligence in a financial matter (e.g. business valuation).
7) Project Accounting refers to the use of accounting system to track the financial progress of a project through frequent financial reports. Project accounting is a vital component of project management. It is a specialized branch of management accounting with a prime focus on ensuring the financial success of company projects such as the launch of a new product. Project accounting can be a source of competitive advantage for project-oriented businesses such as construction firms.
8) Social Accounting, also known as Corporate Social Responsibility Reporting and Sustainability Accounting, refers to the process of reporting implications of an organization's activities on its ecological and social environment. Social Accounting is primarily reported in the form of Environmental Reports accompanying the annual reports of companies. Social Accounting is still in the early stages of development and is considered to be a response to the growing environmental consciousness amongst the public at large.
- Finance may be defined as the art and science of managing money. It includes financial service and financial instruments.
- Finance also is referred as the provision of money at the time when it is needed.
- Finance function is the procurement of funds and their effective utilization in business concerns.
- The concept of finance includes capital, funds, money, and amount.
DEFINITION OF BUSINESS FINANCE: According to the Wheeler,
“Business finance is that business activity which concerns with the acquisition and conversation of capital funds in meeting financial needs and overall objectives of a business enterprise”
Generally accepted accounting principles (GAAP) are the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice.
What are the various streams of accounting?
1) Financial Accounting: is the process in which business transactions are recorded systematically in the various books of accounts maintained by the organization in order to prepare financial statements. Theses financial statements are basically of two types: First is Profitability Statement or Profit and Loss Account and second is Balance Sheet.
2) Cost Accounting: is the process of classifying and recording of expenditure incurred during the operations of the organization in a systematic way, in order to ascertain the cost of a cost center with the intention to control the cost.
3) Management Accounting: is the process of analysis, interpretation and presentation of accounting information collected with the help of financial accounting and cost accounting, in order to assist management in the process of decision making, creation of policy and day to day operation of an organization. Thus, it is clear from the above that the management accounting is based on financial accounting and cost accounting.
4) Governmental Accounting, also known as public accounting or federal accounting, refers to the type of accounting information system used in the public sector. This is a slight deviation from the financial accounting system used in the private sector. The need to have a separate accounting system for the public sector arises because of the different aims and objectives of the state owned and privately owned institutions. Governmental accounting ensures the financial position and performance of the public sector institutions are set in budgetary context since financial constraints are often a major concern of many governments. Separate rules are followed in many jurisdictions to account for the transactions and events of public entities.
5) Tax Accounting refers to accounting for the tax related matters. It is governed by the tax rules prescribed by the tax laws of a jurisdiction. Often these rules are different from the rules that govern the preparation of financial statements for public use (i.e. GAAP). Tax accountants therefore adjust the financial statements prepared under financial accounting principles to account for the differences with rules prescribed by the tax laws. Information is then used by tax professionals to estimate tax liability of a company and for tax planning purposes.
6) Forensic Accounting is the use of accounting, auditing and investigative techniques in cases of litigation or disputes. Forensic accountants act as expert witnesses in courts of law in civil and criminal disputes that require an assessment of the financial effects of a loss or the detection of a financial fraud. Common litigations where forensic accountants are hired include insurance claims, personal injury claims, suspected fraud and claims of professional negligence in a financial matter (e.g. business valuation).
7) Project Accounting refers to the use of accounting system to track the financial progress of a project through frequent financial reports. Project accounting is a vital component of project management. It is a specialized branch of management accounting with a prime focus on ensuring the financial success of company projects such as the launch of a new product. Project accounting can be a source of competitive advantage for project-oriented businesses such as construction firms.
8) Social Accounting, also known as Corporate Social Responsibility Reporting and Sustainability Accounting, refers to the process of reporting implications of an organization's activities on its ecological and social environment. Social Accounting is primarily reported in the form of Environmental Reports accompanying the annual reports of companies. Social Accounting is still in the early stages of development and is considered to be a response to the growing environmental consciousness amongst the public at large.
TYPES OF FINANCE: Finance is one of the important and integral part of business concerns, hence, it plays a major role in every part of the business activities. It is used in all the area of the activities under the different names. Finance can be classified into two major parts:
Private Finance, which includes the Individual, Firms, Business or Corporate Financial activities to meet the requirements.
Public Finance which concerns with revenue and disbursement of Government such as Central Government, State Government and Semi-Government Financial matters
What is the scope of finance function?
What are the goals of finance function?
- Profit Maximization
- Wealth Maximization
What is the relation of finance function to other functions of a business enterprise?
What do you mean by accounting concepts? List them.
Private Finance, which includes the Individual, Firms, Business or Corporate Financial activities to meet the requirements.
Public Finance which concerns with revenue and disbursement of Government such as Central Government, State Government and Semi-Government Financial matters
What is the scope of finance function?
- The finance function is concerned with three types of decisions:
- Financing decisions are the decisions regarding the process of raising funds.
- Investment decisions are the decisions regarding the investment of funds.
- Dividend Policy decisions are strategic financial decisions and they are based on the profits earned by the organization. As the shareholders are the owners of the organization thus they are entitled to receive profits in the form of dividend.
What are the goals of finance function?
- Profit Maximization
- Wealth Maximization
What is the relation of finance function to other functions of a business enterprise?
- A business enterprise has many functions apart from finance function such as production, marketing and personnel. All these functions are related to the finance function as they all require funds for their execution.
For example: In production function, to produce good quality of goods and proper functioning of various operations involved in the production function involves investment either in terms of fixed capital or working capital, which is a finance function. The personnel function deals with the availability of proper kinds of laborers at proper time, their training etc. All these activities need funds. All the activities or functions are finally related to the finance function. The success of a business depends on the coordination between these functions.
What do you mean by accounting concepts? List them.
- Accounting concepts are those basis assumptions upon which basic process of accounting is based. Following are the basic accounting concepts:
- a) Business Entity Concept:
According to this concept, the business has a separate legal identity than the person who owns the business. The accounting process is carried out for the business and not for the person who is carrying out the business. This concept is applicable to both, corporate and non corporate organizations.
b) Dual Aspect Concept:
According to this concept, every transaction has two affects. This basic relationship between assets and liabilities which means that the assets are equal to the liabilities remains the same.
c) Going Concern Concept:
According to this concept, the organization is going to be in existence for an indefinite period of time and is not likely to close down the business in the shorter period of time. This affects the valuation of assets and liabilities.
d) Accounting Period Concept:
According to this concept, the indefinite period of time is divided into shorter time periods, each one being in the form of Accounting period, in order to facilitate the preparation of financial statements on periodical basis. Selection of accounting period depends on characteristics like business organization, statutory requirements etc.
e) Cost Concept:
According to this concept, an asset is recorded at the cost at which it is acquired instead of taking current market prices of various assets.
f) Money Measurement Concept:
According to this concept, only those transactions find place in the accounting records, which can be expressed in terms of money. This is the major drawback of financial accounting and financial statements.
g) Matching Concept:
According to this concept, while calculating the profits during the accounting period in a correct manner, all the expenses and costs incurred during the period, whether paid or not, should be matched with the income generated during the period.
What are capital expenditures? Is it Ok to consider these expenditures while calculating the profitability of during a certain period?
1)Capital Expenditure is an amount incurred for acquiring the long term assets such as land, building, equipment’s which are continually used for the purpose of earning revenue. These are not meant for sale. These costs are recorded in accounts namely Plant, Property, Equipment. Benefits from such expenditure are spread over several accounting years.
2) E.g. Interest on capital paid, Expenditure on purchase or installation of an asset, brokerage and commission paid.
3) No, Capital expenditure should not be considered while calculating profitability as benefits incurred from the capital expenditure are long term benefits and cannot be shown in the same financial years in which they were paid for.
4) They need to be spread over a number of years to show the true position in balance sheet as well as profit and loss account.
1)Capital Expenditure is an amount incurred for acquiring the long term assets such as land, building, equipment’s which are continually used for the purpose of earning revenue. These are not meant for sale. These costs are recorded in accounts namely Plant, Property, Equipment. Benefits from such expenditure are spread over several accounting years.
2) E.g. Interest on capital paid, Expenditure on purchase or installation of an asset, brokerage and commission paid.
3) No, Capital expenditure should not be considered while calculating profitability as benefits incurred from the capital expenditure are long term benefits and cannot be shown in the same financial years in which they were paid for.
4) They need to be spread over a number of years to show the true position in balance sheet as well as profit and loss account.
Explain deferred expenditures. How are these expenses dealt with in profitability statement?
1) Deferred Revenue Expenditure is revenue expenditure, incurred to receive benefits over a number of years say 3 or 5 years.
2)These expenses are neither incurred to acquire capital assets nor the benefits of such expenditure is received in the same accounting period during which they were paid.
3)Thus they don’t affect profitability statement as they are not transferred to the profitability statement in the period during which they are paid for.
4) They are charged to profit and loss account over a number of years depending upon the benefit accrued.
Explain Revenue Expenditure. Does it affect the profitability statement in a period?·Revenue
1) Expenditure is the expenditure incurred in one accounting year and the benefits from which is also enjoyed in the same period only.
2)This expenditure does not increase the earning capacity of the business but maintains the existing earning capacity of the business. It included all the expenses which are incurred during day to day running of business.
3) The benefits of this expenditure are for short period and are not forwarded to the next year. This expenditure is on recurring nature. ·As the return on revenue expenditure is received in the same period thus the entries relating to the revenue expenditure will affect the profitability statements as all the entries are passed in the same accounting year, the year in which they were incurred.
Explain Real Accounts. List different accounts consisting real accounts in practical circumstances.·
Real accounts are the accounts of assets which the company owns and accounts of liabilities which the company owes. Real Account may also consist of some intangible assets. Real Accounts consist of following types of accounts:·
-Building Account
-Furniture Account
-Machinery Account
-Land Account
-Goodwill Account
-Patent Trade Marks Account
What is the principal of Double Entry system of accounting? What are the advantages of Double Entry system of accounting?
1) The principal of Double Entry system of Accounting is “Every debit has a corresponding credit” hence the total of all debits has to be equal to the total of all credits. In simple words, every business transaction affects two accounts. If one account is debited then the other account will be credited with the similar amount.
2) For example: if the business purchases a machinery worth Rs. 500000, then machinery account gets debited with amount Rs. 500000 as the business is receiving an asset for its operation, on the other side cash account automatically gets credited with the same amount of Rs. 500000 as cash is going out of the business.
3) Advantages of Double Entry system of Accounting:·It considers both the aspects of business transaction· Arithmetic accuracy of the accounting records can be checked and verified by preparing trial balanceCorrect results of the operations can be ascertained by preparing Final Accounts Correct valuation of assets and liabilities at any point of time by preparing Balance sheet
What are the rules of double entry book keeping for various types of accounts?
Following are the basic rules of double entry book keeping for various types of accounts:
Personal Account : Debit the Receiver, Credit the Giver
Real Account : Debit what comes in, Credit what goes out
Nominal Account : Debit all the Expenses, Credit all the Incomes
What is depreciation? What are the causes of depreciation? Is it a cost? Why?
Following are the causes of Depreciation:
-Wear and Tear due to regular use of the asset
-Deterioration occurs with the passage of time, whether the asset is in use or not
-Damages done to the assets due to an accident like fire, mishandling etc.
-Depletion of Asset
-Obsolescence i.e. due to new technology in use, new inventions, innovations etc.
Yes, depreciation is a cost. It is a historical cost, which is charged against profits of the organization reducing the profitability. It is a non-cash cost as it is never paid or incurred in cash.
What is the need of depreciation account?
What is the effect of depreciation of assets on profits received by owners?
What are the entries to be passed for preparing final accounts?
Explain Bank Reconciliation Statement. Why is it prepared?
1) Bank Reconciliation Statement is a statement prepared to reconcile the balances of cash book maintained by the concern and pass book maintained by the bank at periodical intervals.
2) At the end of every month entries in the cash book are compared with the entries in the pass book.
3) The causes of differences in balances of both the books are scrutinized and then reconciliation statement is prepared.
4) This statement is prepared for a special purpose and once in a month. It is prepared with a view to indicate items which cause difference between the balances as per the bank columns of the cash book and the bank pass book at a particular date.
What are the reasons which cause pass book of the bank and your bank book not tally?
* Cheques deposited into the bank but not yet collected
* Cheques issued but not yet presented for payment
* Bank charges
* Amount collected by bank on standing instructions of the concern.
* Amount paid by the bank on standing instructions of the concern.
* Interest debited by the bank
* Interest credited by the bank
* Direct payment by customers into the bank account
* Dishonour of cheques
* Clerical errors
What does capital market mean? How does the company raise funds in capital market?
What "rights issue" do the shareholders of a company have under Companies Act, 1956?
What are the eligibility criteria for an unlisted company to make public issue?
Following are the basic rules of double entry book keeping for various types of accounts:
Personal Account : Debit the Receiver, Credit the Giver
Real Account : Debit what comes in, Credit what goes out
Nominal Account : Debit all the Expenses, Credit all the Incomes
What is depreciation? What are the causes of depreciation? Is it a cost? Why?
- Depreciation is a permanent, gradual and continuous reduction in the book value of the fixed asset. Except Land all the fixed assets e.g. Car, Machinery, Furniture etc depreciates in value making the asset useless after the end of a certain period.
Following are the causes of Depreciation:
-Wear and Tear due to regular use of the asset
-Deterioration occurs with the passage of time, whether the asset is in use or not
-Damages done to the assets due to an accident like fire, mishandling etc.
-Depletion of Asset
-Obsolescence i.e. due to new technology in use, new inventions, innovations etc.
Yes, depreciation is a cost. It is a historical cost, which is charged against profits of the organization reducing the profitability. It is a non-cash cost as it is never paid or incurred in cash.
What is the need of depreciation account?
- According to the matching principle of accounting, the costs incurred in the accounting year should be matched with the revenue or income earned during the same accounting year. Thus, it is necessary to spread the cost of fixed asset less scrap or realizable value after the useful life of the fixed asset is over and this process of ascertain the same is called depreciation accounting.
- Thus, depreciation account is needed for mainly two purposes:
- To ascertain due profits and to represent the value of the fixed asset at its unexpired cost that is book value of the asset less depreciation.
What is the effect of depreciation of assets on profits received by owners?
- Depreciation forms a part of cost which is used for arriving at correct estimation of profits, which then is distributed to the owners of the business in the form of dividend. Addition of depreciation to the cost reduces the amount of distributable profits.
- By maintaining a depreciation account a part of the distributable profit is retained in the business as a reserve which is used to purchase new machinery or for other purposes in the future which reduces the profits or dividends received by the owners.
What are the entries to be passed for preparing final accounts?
- Closing Stock
Following entry will be passed:
Closing stock account – Debit
Trading account - Credit
b.) Depreciation
Following entry will be passed:
Depreciation account – Debit
Fixed asset account – Credit
c.) Outstanding Expenses
Following entry will be passed:
Expenses account – Debit
Outstanding account - Credit
d.) Prepaid Expenses
Following entry will be passed:
Prepaid expenses account – Debit
Expenses account – Credit
e.) Accrued Income
Following entry will be passed:
Accrued Income account – Debit
Income account - Credit
f.) Income received in advance
Following entry will be passed:
Income account – Debit
Income received in advance account - Credit
g.) Bad debts
Following entry will be passed:
Bad Debts account – Debit
Sundry Debtors account - Credit
h.) Provision for doubtful debts
Following entry will be passed:
Provision for Doubtful Debts account – Debit
Sundry Debtors account - Credit
i.) Provision for discount on Debtors
Following entry will be passed:
Provision for Discount for Debtors account – Debit
Sundry Debtors account - Credit
j.) Interest on Capital
Following entry will be passed:
Interest on capital account – Debit
Capital account - Credit
k.) Drawings
Following entry will be passed:
Drawing account – Debit
Sales account - Credit
l.) Deferred revenue expenditure written off
Following entry will be passed:
Deferred revenue expenditure written off account – Debit
Deferred revenue expenditure account - Credit
m.) Abnormal Loss
Following entry will be passed:
Abnormal Loss account – Debit
Stock destroyed account – Credit
If the organization has insured the stock with the insurance company then the insurance company settles the claim, either in full or part. In that case the following entry will be passed:
Insurance company account – Debit
Abnormal loss account – Debit
Stock destroyed - Credit
n.) Goods distributed as free samples
Following entry will be passed:
Advertisement account – Debit
Sales account - Credit
o.) Goods sent on approval basis:
Goods sent on approval basis should not be treated as sales till the goods are finally approved by the customer because property in goods is not transferred until the said period is over. If the goods sent on approval basis are treated as sales then closing stock will be increased by the cost of such goods sent on approval basis.
p.) Commission payable to the manager:
Following entry will be passed:
Commission account – Debit
Commission payable account – Credit
Explain Bank Reconciliation Statement. Why is it prepared?
1) Bank Reconciliation Statement is a statement prepared to reconcile the balances of cash book maintained by the concern and pass book maintained by the bank at periodical intervals.
2) At the end of every month entries in the cash book are compared with the entries in the pass book.
3) The causes of differences in balances of both the books are scrutinized and then reconciliation statement is prepared.
4) This statement is prepared for a special purpose and once in a month. It is prepared with a view to indicate items which cause difference between the balances as per the bank columns of the cash book and the bank pass book at a particular date.
What are the reasons which cause pass book of the bank and your bank book not tally?
* Cheques deposited into the bank but not yet collected
* Cheques issued but not yet presented for payment
* Bank charges
* Amount collected by bank on standing instructions of the concern.
* Amount paid by the bank on standing instructions of the concern.
* Interest debited by the bank
* Interest credited by the bank
* Direct payment by customers into the bank account
* Dishonour of cheques
* Clerical errors
What does capital market mean? How does the company raise funds in capital market?
- Capital market is the market in which financial securities have been traded between the individuals and the institutions. These institutions sell securities on capital markets in public and private sectors to raise funds. This market is composed of both primary and secondary markets. The parts of capital markets are both stock and bond markets.
- Large Corporation grow by doing innovations and by raising the capital to finance expansion. Corporations have five primary methods which are used to raise funds in capital market.
1) Issue of bonds : - Bond is an amount of money which has to be given at a certain date or dates in future. Bondholders receive interest payments at fixed rate and specific dates. Corporate issues bonds because interest rates which must pay investors are lower than rates of borrowing and holders can sell bonds to someone else before they due.
2) Issue of preferred stock : - company choose this to raise capital. If a company have financial trouble the buyers of shares gets special status. If profits are limited then owners will be paid the dividend after bondholders receive the interest payments.
3) Sell of common stock : - if financial condition of the company is good then it can raise the capital issue the common stock. Bank helps the companies to do the investment and issue stock. Investors’ gets interested if the company pays large dividends and offers steady income. Value of shares increases if investor expects the corporate earnings to rise.
4) Borrowing:- companies used to raise short term capital by getting the loans from banks or other sources. After good market run the profits which the company gets can be used to finance their operating by retaining their earnings.
What "rights issue" do the shareholders of a company have under Companies Act, 1956?
- The rights and duties of shareholders are defined from time to time of issue of shares. The rights of shareholders are fixed which can't be altered unless the Companies Act gets modified.
- Right issue which shareholders hold of a company under Companies Act, 1956 are as follows:-
1) Rights attached to shares of any class can be varied with the consent of shareholders holding not less than 75% of issued shares.
2) Rights of Dissenting Shareholders: Protection by Companies Act is given to the shareholders who doesn't consent to or vote for variation of their rights. If there is any variance in any rights of any class of shareholders then holders of not less than 10% of shares of that class can apply to the court to have the variation cancelled. It won't have any affect till it is been approved by the court.
3) Voting rights of the members: - Every member of public company which has the shares holding equity has votes in proportions to his share in paid up equity capital.
4) Preference shareholders don't have any voting rights. They can vote only on matters which are directly related to the rights attached to preference share capital.
There is a right to vote for every equity shareholder at general meeting. No company can stop any member from his voting right on any ground. The members voting rights can be changed if member doesn't make payment or other sums which are due against.
What are the eligibility criteria for an unlisted company to make public issue?
- The eligibility criteria which have to be satisfied by the Unlisted Company to make public issue are as follows:
-
- 1. Pre-issue net worth of company should not be less than Rs. 1 crore and it should be maintained for last 3 out of 5 years with minimum net worth.
- 2. The net worth should be met for upcoming 2 years.
- 3. Tracking of the records of profits has to be maintained for at least 3 years out of immediately upcoming 5 years.
- 4. Issue size should not be more than 5 times its pre-issue net worth.
- 5. Incase these requirements are not satisfied then the company can issue through book-building process, it has to allot at least 60% of issue size to Qualified Institutional Buyers.