What is financial Capital?

What is financial Capital?

Definition: Financial capital is a much broader term than economic capital. In a sense, anything can be a form of financial capital as long as it has a money value and is used in the search of future revenue. Most investors encounter financial capital with respect to debt and equity.
Direct investment in a business is referred to as equity. When someone contributes Rs.1500000 to a business in the hopes of receiving a portion of future profits, he increases its equity capital by Rs.500000. Corporations issue stocks, or shares of company ownership, in exchange for additional equity. Equity capital is not typically accompanied by a guarantee of future returns.
Sometimes a business decides to finance its activities through debt instead of equity. Debt capital does not dilute ownership and does not entitle the creditor to a proportional share of future profits. However, debt represents a legal claim on the assets of the borrowing company and is considered riskier that equity capital. Companies that cannot repay their creditors have to file bankruptcy.

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What’s mean by a business transaction?

What’s mean by a business transaction?

A business transaction is an activity that can be deliberate in terms of money and which affects the financial position or operations of the business entity. In other words, it has an effect on any of the accounting elements

    a- Assets

           b-Liabilities

         c-Capital
         d- Income

         e- Expense.

Transactions may be classified as

 1-Exchange

 2- Non-exchange

Exchange transactions involve physical exchange such as
  Purchasing
 Selling
 Collection of receivable
 Payment of accounts

Non-exchange transactions are events that do not involve physical exchanges but where changes in monetary values are determinable, e.g.

 Wear and tear of equipmen

 Fire loss

 Typhoon loss, etc.

To qualify as an accountable/recordable business transaction, the activity or event must:

1. Be a transaction involving the business entity

The separate entity concept or accounting entity assumption clearly establishes a distinction between transactions of the business and those of its owner/s.

If Mr. XYZ an owner of company, buys a car for personal use using his own money, it will not be reflected in the books of the company. Why? Because it does not have anything to do with the business. Now if the company purchases a delivery truck, then that would be a business transaction of the company.

If Mr. XYZ invests $20,000 into the company, would that be recorded in the books of the business? Ask this: Does it have anything to do with the company? Yes. Then, that would be a recordable business transaction.

In any case, always remember that a business is treated as an individual entity, separate and distinct from its owners.

2. Be of a financial character (in a certain amount of money)

Transactions must involve monetary values, meaning a certain amount of money must be assigned to the elements or accounts affected.

For example, XYZ renders video coverage services and expects to collect $10,000 after 10 days. In this case, it's explicit. The income and receivable can be measured reliably at the $10,000.

Fire, typhoon and other losses may be estimated and assigned with monetary values.

The mere request (order) of a customer is not a recordable business transaction. There should be an actual sale or performance of service first to give the company a right over the income or revenue.

3. Have a dual or "two-fold" effect on the accounting elements

Every transaction has a dual or two-fold effect. For every value received, there is a value given; or for every debit, there is a credit. This is the concept of double-entry accounting.

For example, Bright Productions purchased tables and chairs for $6,000. The company received tables and chairs thereby increasing its assets (increase in Office Equipment). In return, the company paid cash; thus, there is an equal decrease in assets (decrease in Cash).

4. Be supported by a source document

As part of good accounting and internal control practice, business transactions must be supported by source documents. The source documents serve as bases in recording transactions in the journal.

Examples of source documents are: Official Receipt issued whenever cash is received, Sales Invoice for sales transactions, Cash Voucher for payment in cash, Statement of Account from suppliers, Vendor's Invoice, Promissory Notes, and other business documents.

The first step in the accounting process is actually to prepare the source document and determine the effects of the business transaction to the accounts of the company. After which, the accountant records the transaction through a journal entry.

Examples of business transactions will be given and explained in detail as you go through the lessons in this chapter. To see how business transactions are actually analyzed, you may jump to Accounting Equation, Journal Entries, and More Journal Entry Examples. The next lessons will discuss the rules of debit and credit, and chart of accounts first.

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32 Basic Accounting Terms, Acronyms and Abbreviations

32 Basic Accounting Terms, Acronyms and Abbreviations :

Does n’t matter what career you are pursuing, you will need to learn the language used in your field or industry. All industries have their own unique blend of terms, acronyms and abbreviations, it is depend on the nature of industries, and mostly there are some terms which are common.

If you want to fully understand the industry and your organization in order to do your job effectively, it’s very important you understand this language from the start.

"Accounting is the language of business. Knowing the language is critical for success in any corporate function because the information is communicated using these terms,”

Because of the strange accounting job titles, different accounting myths and these industry terms, it’s not uncommon for people to think working in accounting is complicated or confusing when really it’s just got its own unique language.

As someone new to the accounting industry, you will be introduced to a variety of new terms. Beware: they may seem intimidating at first.  But familiarizing yourself with these basic accounting terms, acronyms and abbreviations early on will help you better prepare for a successful accounting career. Knowing how to talk the talk will allow you to quickly shift your focus in the classroom beyond these terms and toward learning the accounting techniques you will use in your job.

Read through these basic accounting terms, study them and commit them to memory. By the time you finish your accounting degree, they will be second nature to you and you will be on your way to a promising career.

1. Accounts Receivable

Definition: The amount of money owed by your customers after goods or services have been delivered and/or used. See how it works here.

2. Accounting 

Definition: A systematic way of recording and reporting financial transactions.

3. Accounts Payable

Definition: The amount of money you owe creditors (suppliers, etc.) in return for good and/or services they have delivered.  See how it works here.

4. Assets (Fixed and Current)

Definition: Current assets are those that will be used within one year. Typically this could be cash, inventory or accounts receivable. Fixed assets (non current) are more long-term and will likely provide benefits to a company for more than one year, such as a building, land or machinery. 

5. Balance Sheet

Definition: A financial report that summarizes a company's assets (what it owns), liabilities (what it owes) and owner’s equity at a given time.

6. Capital

Definition: A financial asset and its value, such as cash or goods. Working capital is calculated by taking your current assets subtracted from current liabilities.

7. Cash Flow

Definition: The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time. Having a positive cash flow is essential in order for businesses to survive in the long run.

8. Certified Public Accountant

Definition: A designation given to someone who has passed a standardized CPA exam and met government-mandated work experience and educational requirements to become a CPA.

9. Cost of Goods Sold

Definition: The direct expense related to producing the goods sold by a company. This may include the cost of the raw materials (parts) and amount of employee labor used in production.

10. Credit

Definition: An accounting entry that may either decrease assets or increase liabilities and equity on the company's balance sheet, depending on the transaction. When using the double-entry accounting method there will be two recorded entries for every transaction: a credit and a debit.

11. Debit

Definition: An accounting entry where there is either an increase in assets or a decrease in liabilities on a company's balance sheet.

12. Expenses (Fixed, Variable, Accrued, Operation)

Definition: The fixed, variable, accrued or day-to-day costs that a business may incur through its operations. Examples of expenses include payments to banks, suppliers, employees or equipment.

13. Generally Accepted Accounting Principles

Definition: A set of rules and guidelines developed by the accounting industry for companies to follow when reporting financial data. Following these rules is especially critical for all publicly traded companies.

14. General Ledger

Definition: A complete record of the financial transactions over the life of a company.

15. Liabilities (Current and Long-Term)

Definition: A company's debts or financial obligations it incurred during business operations. Current liabilities are those debts that are payable within a year, such as a debt to suppliers. Long-term liabilities are typically payable over a period of time greater than one year. An example of a long-term liability would be a bank loan.

16. Net Income

Definition: A company's total earnings, also called net profit or the “bottom line.” Net income is calculated by subtracting totally expenses from total revenues.

17. Owner's Equity

Definition: An owner’s equity is typically explained in terms of the percentage amount of stock a person has ownership interest in the company. The owners of the stock are commonly referred to as the shareholders.

18. Present Value

Definition: The value of how much a future sum of money is worth today. Present value helps us understand how receiving $100 now is worth more than receiving $100 a year from now. See an example of the time value of money here.

19. Profit and Loss Statement

Definition: A financial statement that is used to summarize a company’s performance and financial position by reviewing revenues, costs and expenses during a specific period of time; such a quarterly or annually.

20. Return on Investment

Definition: A measure used to evaluate the financial performance relative to the amount of money that was invested. The ROI is calculated by dividing the net profit by the cost of the investment. The result is often expressed as a percentage. See an example here.

21. Accountant

Definition: The person who categories and pass financial data to a bookkeeping system or in any accounting information system, People often thinks that bookkeeper and accountant is the same thing. Similarly Accountant refers to the person who makes the annual financial statements and tax calculations

22. Amortization

Definition: The intangible assets whose property right is obtained for specific period of time, diminishes in value with passage of time this called as amortization.

The example are patient rights, copy right, goodwill etc similarly, the value of leasehold property also decreases with the passage of time.

23. Bookkeeper

Definition: A qualified person who collects, records and report on the financial transactions carried out by a business is called Bookkeeper. 

24. Bankrupt
A company inability to pays debts is called bankrupt or insolvent.

25. Budget

The budget is a financial plan in which a business decides what it estimates it will earn in the year ahead, where these estimated will be spend, and then comparing/checking the actual figures and budgeted figures.

26. Bad Debts/ Uncollectable 

The amount which cannot be received from debtors is called bad debts.

27. Chart of Accounts

Chart of Accounts is a listing of all accounts used in the general ledger, usually organized in order by account number. The accounts are usually numeric, but can also be alphabetic or alphanumeric. The account numbering system is used by the accounting software to aggregate information into an entity’s financial statements.

28. Cash Discount

A discount, which allowed or received at the time of cash payment on credit sale or purchase is called cash discount. It has two types.

1. Discount received
2. Discount allowed.

29. Commission

Remuneration for services performed by one person to another normally on the percentage basic is called commission.

30. Drawings

The cash or commodities withdraw by the owner for his personal uses from business are known as drawings

31. Financial Statements

The basic accounting term “financial statements” means that the statements shows the financial positions of a business organization after a year are called Financial Statements.

32. Trade Discount

Trade Discount is a basic accounting terms which means when concession or allowance or rebate is given by seller to buyer on listed or scheduled price of goods at the spot of sale is called trade discount and there is no accounting of trade discount.

Trade discount is usually allowed or granted in following circumstances.

1. When selling to a fellow trade.
2. When the buyer is an old customer.
3. When sale are made in bulk.
4. As a custom of trade.

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Types of accounting information

There are many types of accounting information; as a result, they vary greatly. A number of factors influence these information systems such as:

  ü  Type of business

  ü  Size of the business

  ü  The volume of data

  ü  The type of data management needs

  ü  Other factors.

Most businesses are using different types of information systems.

1-    Electronic Data Processing (EDP) Systems

Most businesses, except for the smallest, use computerized systems, also called electronic data processing (EDP) systems.

These systems handle every step in the accounting process from recording the financial transaction to preparing the financial statements. Businesses are constantly improving their systems technology in order to remain competitive and to stay in compliance with the Sarbanes-Oxley Act of 2002. Even the smallest businesses may choose to use systems like QuickBooks, Pech Tree and Ms. Office.

2-    Manual systems

Manual accounting information systems are used mostly by very small businesses and home-based businesses.

 If a system is entirely manual, it would require the following: source documents, general ledger, general journal, and special journals or subsidiary journals you might need.

3-    Legacy systems

Legacy systems are often in existing business firms and were used before information technology got as sophisticated as it is today. Even though legacy systems may appear to be old-fashioned, they have some definite advantages to the firm. They contain valuable historical data about the firm. The firm personnel tend to know how to use the system and understand it. A legacy system has usually been customized to the specific needs of an individual firm. You won't find this kind of customization in generic accounting software packages.

Unfortunately, legacy system also have significant disadvantages. Often, they have no documentation. It is usually hard to find replacement parts because hardware and software may become obsolete. Even the computer language that legacy systems use is usually an older language. Most legacy systems have been built from scratch.

a-    Replacement of Legacy Systems

You can completely replace your legacy system with a new, up-to-date system. That is quite an expensive solution. You can also update your legacy system. You can use a procedure called screen scraping, which is a technique that takes the data displayed on the computer screen and translates it so a newer application can read it. You can also set up an enterprise application integration system. This type of system networks the different applications in your legacy system, such as inventory, payroll, and others.

If you are a SMB, unless you are the smallest, hone-based variety, you will want your accounting information system to be up-to-date in order to keep you competitive within your industry. There are many options to choose from.

Transactions and Processes basis of Business

In order to understand how these accounting information systems work, you have to understand the basic accounting terms "business transactions" and "business processes." Most importantly, you need to understand how business transactions and processes come together to generate financial reports. With regard to accounting information systems, business transactions can be divided into several types of business processes:

Ø  Revenue and return processes, systems, and controls

The business transactions that fall under these business processes are large volumes of daily sales, returns, and cash inflow transactions.

Ø  Expenditure and return processes, systems, and controls

The business transactions that fall under these business processes are large volumes of expenditure, returns, and cash outflow transactions. Payroll and fixed asset purchase transaction are also in this category.

Ø  Conversion processes, systems, and controls

 The business transaction under this category are raw materials and work-in-progress transactions.

Ø  Administrative processes, systems, and controls

The business transactions that are administrative are investments, borrowing, and capital transactions.

All of these business transactions result in T-accounts set up in the General Ledger processes, systems, and controls. From the general ledger, both internal and external financial statements are developed. Internal financial reports might be an aging schedule for accounts receivable or a sales inventory status report. External financial reports would be the income statement, balance sheet, and statement of cash flows.

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