Thursday, 26 October 2017

Basic Accounting Terms - 1

Accounting terminology-

Basic Accounting Terminologies
Basic Accounting Terms

Capital: Capital means an amount invested by the owner in the business. Investment by the owner can be in the form of cash or in kind. For example, if the owner uses personal furniture for the business it will be recognized as the capital

Liability: Liability is something which the business owes. For example, a loan from a bank

Current liabilities: Current liabilities are the liabilities which the business has to pay within a year. These are short-term liabilities. For example, trade creditors. Trade Creditors are the suppliers from whom we purchase the goods on credit. Usually, the payment to trade creditors is made within one year. Other examples of current liabilities are outstanding(unpaid) salaries, tax payable, etc.

Contingent Liability: Contingent Liability is that kind of a liability which is non-existent as on date, but it may become an actual liability in the future. For example, if a customer has filed a suit against the company for some compensation. This can become an actual liability in the future if the firm loses the case. However, as on date, it is not a liability as the outcome is not known today

Asset: Asset means something which the business owns. For example, plant and machinery, land and building, furniture and fixtures, Investments etc.

Fixed Assets: Fixed assets are long-term assets. These are assets which are purchased for use over a long period of time (Generally more than one year).  For example, land and building, plant and machinery, furniture and fixtures, etc.

Current Assets: These are short-term assets. Current assets are assets which are expected to be converted to cash within a year. For example, Debtors. Debtors are the customers to whom we have sold the goods on credit. Generally, the amount receivable from debtors is received within a year's time.

Liquid Assets: Liquid assets include cash and all other assets which can be converted into cash at a very short notice. These are the assets which can be disposed of quickly. They are also called quick assets. For example, cash in hand, cash at bank, shares etc.

Tangible Assets: These are assets which have physical existence. We can touch, see or feel these assets. For example, plant and machinery

Intangible assets: These are the assets which do not have any physical existence. It is not possible to see, touch or feel them. For example, Goodwill (Goodwill is the reputation of the firm expressed in terms of money).

Fictitious Assets: As the name suggests, these are not assets in a true sense. These generally include some one time heavy expenses which are not considered as an expense only in the year in which they were incurred. Rather, these expenses are shown as expenses over few accounting years. If the entire amount of these expenses is considered as an expense in the year of occurrence, these expenses may result in a big loss in that particular year. So these expenses are spread out over a few years. For example, preliminary expenses. These are expenses incurred at the time of starting the business. If the entire amount of preliminary expenses is assigned to the first year only, it would result in a huge loss in the first year itself. So instead of treating the entire amount of preliminary expenses as an expense of the first year, these expenses would be spread out over a few accounting years. For example, say preliminary expenses are Rs.100/-. So what the firm may do is spread it over a period of say 5 years. So in the first year, only Rs.20/- (Rs.100 divided by 5) would be considered as preliminary expenses and balance Rs.80/- would be shown as an asset (fictitious asset) in the first year. During the second year, again Rs.20/- will be considered as preliminary expenses and balance Rs.60/- would be shown as an asset (fictitious) in the second year, so on and so forth. Thus, such expenses are spread out over a period of accounting years.

Depreciation - The word depreciation has been derived from the Latin word 'Depretium' which means 'decline' or 'reduction' in price or value. Depreciation is a continuous, gradual and permanent decrease in the value of fixed assets. For example, machinery purchased today will not have the same value after 5 years, even if it is unused. This reduction in value of machinery is called as Depreciation.

Balance Sheet - A balance sheet is a statement that shows a company's assets and liabilities as on a particular date. The balance sheet gives an idea as to what the company owns and owes. In simple words, it shows the financial health of the business

Goodwill - Goodwill is the monetary value of the reputation of the firm. Some firms develop a good reputation in the market over a period of time. For example, Tata Group companies, L & T, Google, etc. Such reputation expressed in monetary terms is called Goodwill. This reputation helps these firms to earn more profits as compared to a newly started business.

Bad Debts - Bad debts refer to irrecoverable dues (from the debtors). For example, suppose you have sold the goods worth Rs.10,000/- to Mr.X on credit. But he is able to repay only Rs.9000/-. In such a case, Rs.1,000/- would be considered as bad debts. Bad debt is a loss to the business which reduces its profit.

Read Further - Basic Accounting Terms II

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Monday, 23 October 2017

Causes of rejection of a home loan

When you are applying for a home loan, you need to know the reasons due to which your home loan may get rejected. It will save a lot of time and money for you, but more importantly, it will save you from distress you will have to undergo should your home loan get rejected

Reasons for rejection of Home loan
Reasons for rejection of a housing loan

Following are some of the most common reasons why your home loan application can get rejected-

1. Bad Credit History - If you have not paid your past loans regularly, most frontline institutions would reject your home loan application. If there are just a couple of minor delays in repayment track record of any of your past loans, your application can be considered provided you can justify the delay in repayment. Some borrowers are intentional defaulters and hence most leading home finance institutions do not compromise much on this point.

2. Title of the property is not clear - The property that you are purchasing should have a clear and marketable title. The seller/s of the property must be the legal owner/s and should have right to sell the property. Banks do not want to get into legal battles over the title of the property. If the lender feels that the title of the property is not clear, the loan may be rejected

3. If the property you are buying falls in a negative area - Some banks do mark some areas as negative areas. These are generally the areas where recovery of the loans may be difficult (areas having a lot of anti-social elements) or the areas where properties generally have structural issues (land may not be very suitable for construction of buildings or the area may have a history of collapsing of some buildings etc.). These are the areas where they do not lend the money. So if the property you intend to buy falls in the negative area of the bank to which you have applied for a home loan, your home loan application would be turned down no matter how strong your financial position may be

4. Dishonor of processing fee cheque - This is one reason that the home loan borrower needs to know before applying for the home loan. If the processing fees cheque gets dishonored, your home loan will not be disbursed. Banks see this as a sign of financial distress and hence do not disburse the loan on the bouncing of processing fee cheque (even if they may have issued an in-principle sanction letter)

5. Inter-Family Transactions - If you are buying the property from anyone who has a blood relation with you, your loan might get rejected, as most banks do not offer home loans on Inter-Family Transactions. They see this as an arrangement within the family to get a loan at lower interest rate as usually other loans are priced quite higher than home loans

6. Cheque Bounces in your Bank a/c - Too many cheque bounces in your bank a/c may also lead to rejection of your loan. It gives an impression that either you are in a financial crunch or you are too casual in fulfilling your financial commitments

7. Deliberate Hiding of some vital Information - It's always advisable to correctly reveal all the important information sought by the lender. A deliberate hiding of any material information may lead to immediate rejection of your loan. You should not break the trust of the lender by holding back some vital information that may have an impact on bank's decision to provide you the home loan applied for.

Also refer -

What is Pre-Approved Home Loan?

Factors that affect your home loan eligibility

Friday, 13 October 2017

Types of Bank Accounts

There are broadly two types of bank deposits -
(a) Demand deposits - There is no fixed tenure of these deposits. The deposits are repayable on demand. The account holder can withdraw his money anytime. Savings account and Current account are demand deposits.

(b) Term/Time Deposit - Here there is a fixed tenure of the deposit. Recurring Deposit and Fixed Deposit fall under this category.

Accordingly, there are basically four different types of bank accounts. They are as follows-

Types of Bank Accounts in India - Economics

1. Current Deposit Account - This account is generally meant for businessmen. This is because they have a high frequency of bank transactions. They usually have multiple transactions daily. Under this account, there is no restriction on the number of withdrawals and hence is most suitable for businessmen. No interest is paid by the banks on such accounts. The customer gets the cheque book facility for the current account. Some current account holders are also given overdraft facility. Overdraft is a credit facility offered to current a/c holders. An overdraft is like a temporary loan given to the customer to clear/honour cheques already issued by him (in case of insufficient balance in the current account of the customer). For example, say you have a current a/c but balance as on date is zero. Let us say you have been assigned an overdraft limit of Rs.50,000/- on your current a/c. A cheque of Rs.25,000/- issued by you has come for clearing today. Bank will honour the payment even though you have zero balance. You can later repay Rs.25,000/- back to the bank and you will be charged interest from today till the day of repayment of this amount. There is an upper limit on the amount of overdraft for each eligible customer which is decided by the bank itself based on the financial documents of the account holder, his past record and the relationship of the customer with the bank.

2. Savings Deposit Account - This account is made for the general public especially salaried people. The main objective of having the savings account is to cultivate the habit of saving among people. Interest is also paid by the banks on the savings account. The interest rate is moderate (less than the rate of interest offered on recurring or fixed deposit account). However, there are restrictions on the number of withdrawals that can be made through savings account and hence this type of account is not suitable for businessmen. Customers are generally required to maintain a certain minimum balance in the account. Failure to maintain the minimum balance may result in minimum balance charge being deducted from the savings account. No overdraft facility is offered on a savings account. Saving account holders are given cheque book facility.

3. Recurring Deposit Account - This type of account is also called the cumulative time deposit account. It is meant to cultivate the habit of savings among the economically weaker section of the society. Under this type of an account, the customer is allowed to deposit a certain small but fixed amount (Rs.50, Rs.100, Rs.500 etc.) every month for a fixed period of time. The customer gets back the total amount deposited along with interest at the end of the specified period. This type of account does not have the facility of withdrawal. The chequebook facility is not given to recurring deposit account holders. However, they do get a passbook which shows the amount deposited every month along with the interest amount for each month. 

4. Fixed Deposit Account - Under this type of account, a one-time lump-sum deposit is made by the customer for a fixed period of time (generally 3 months to 10 years). The customer cannot withdraw the amount during this period (All banks these days allow pre-mature withdrawal of fixed deposit i.e, withdrawal of fixed deposit amount before the end of the term of the deposit. Banks deduct some amount from interest earned as a penalty for pre-mature withdrawal). However, he can take a temporary loan against the fixed deposit receipt (FDR). At the end of the fixed period, the customer can either withdraw the amount or renew the fixed deposit. The rate of interest offered under this account is highest among all the four main types of accounts. This type of account does not have a passbook or cheque book facility. The customer gets a fixed deposit receipt (FDR) as a proof of the fixed deposit.

Multiple Option Deposit Account: A lot of banks have recently introduced this type of bank account. It is a type of Savings Account in which deposit in excess of a particular limit gets automatically transferred into Fixed Deposit. For example, suppose the limit for automatic transfer of funds from savings account to fixed deposit is Rs.10,000/-. If you are having a balance of Rs.50,000 is this type of an account, Rs.40,000/- will be automatically transferred to a fixed deposit account. This means you would earn a higher rate of interest on Rs.40,000/- (since rate of interest on fixed deposit is always more than interest on savings account).On the other hand, in case adequate fund is not available in the Savings Bank Account so as to honour a cheque that you may have issued, the required amount gets automatically transferred from Fixed Deposit to the Savings Bank Account. The balance amount remaining in fixed deposit account (after transfer of required amount from fixed deposit to savings account) continues as Fixed Deposit. 

Related Posts - 
Types of Banks 

Sunday, 8 October 2017

Demerits of a Joint Stock Company

Disadvantages of Joint Stock Company are as follows-

1. Difficulty in Formation - Formation of a joint stock company, especially public limited company involves a lot of legal procedures. It is time-consuming and expensive too. Registration of joint stock companies is mandatory. Also at the time of formation, certain legal documents like MOA (Memorandum of Association), AOA (Articles of Association) etc.

2. Slow Decision Making - Decision making is slower in case of public limited companies. The company is run by the Board of Directors. The decisions are taken jointly by the Board of Directors. Also in taking certain decisions, they have to seek shareholders approval by calling a meeting of shareholders. This is mandatory as per law. Since there are a lot of people involved in decision making, the process of decision making takes time.

3. Low Motivation - The ownership and management of public limited companies are different. The company is run by the Board of Directors who are people appointed by the owners (shareholders). Board of Directors run the business on behalf of the shareholders. It's the Board of Directors who run the company, but profit belongs to all the shareholders of the company. Hence there is no direct relationship between efforts and rewards. (In some other forms of business organizations like sole proprietorship, more efforts lead to more profit  for the owner/s). There is no incentive for the Board of Directors to work hard.

4. Lack of Secrecy - In case of a public limited company, there is lack of secrecy. The companies have to publish their financial details/accounts on a regular basis as per law. They have to send an annual report of the business to all the shareholders every year. This means a lot of information can also be viewed by anyone (including competitors). Certain decisions cannot be taken without the approval of shareholders. This also leads to dilution of business secrecy.

5. Excessive Government Control - There are a lot of rules and regulations that have to be followed while running the business. This consumes a lot of time in certain situations. This also reduces the flexibility in doing the business.

Related Posts -

Joint Stock Companies and its types.

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Wednesday, 4 October 2017

Advantages of Joint Stock Company

Joint Stock Company is one of the various forms of business organizations.

Merits of Joint Stock Company
Merits of Joint Stock Company

Advantages of Joint Stock Company are as follows-

Large Capital - Public Limited Company can raise a huge amount of capital as there is no upper limit on the number of owners (shareholders) that a public limited company can have. You don't need a huge capital to invest in a public limited company. Owners can invest even a small amount of capital. Public Limited Companies have a large number of shareholders. So even if every shareholder invests a small amount of money still the company can create a large capital base.

Growth Opportunities - As the company has a large capital base growth opportunities are also enormous, especially in case of a public limited company. Even after the company has commenced the business, if a public limited company requires more capital, it can always issue more shares.

Democratic Management - Public Limited Companies have a large number of shareholders. The company is run by the Board of Directors. And the Board of Directors is appointed by the shareholders. The Board of Directors is answerable to the shareholders. Thus the business is run by the Board of Directors who are appointed by the owners/shareholders themselves.

Limited Liability - The owners of Joint Stock Company have limited liability. In case the company becomes insolvent/bankrupt and is unable to pay off business liabilities out of business assets, the personal assets of the owners/shareholders cannot be used to repay the liabilities of the company.

Professional Management - Since Public limited companies have access to large financial resources, it is possible for a public limited company to appoint professionals who are experts in different areas. The directors are generally well educated and are experts in different areas of management. Thus the business is managed professionally. Availability of experts of different areas results in better decision making and increased efficiency in the operation of business activities

Perpetual Existence - Joint Stock Company has a separate legal identity from its owners. It has a separate legal status, which means in the eyes of the law the joint stock company is different from its owners. Death, Insolvency or Insanity of any of the owners doesn't result in the closure of the company.

Transferability of Shares - Shares of a public limited company are listed on the stock exchange and are easily transferable. A shareholder who wants to sell his/her share can do so through a stock exchange

Economies of Large-Scale Operations - Since public limited companies have large-scale operations, they enjoy economies of the scale (Low cost due to the high volume of business). They have a better bargaining power than other form of business organizations.

Read further - Demerits of Joint Stock Company

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