Key accounting definitions

FIGURING IT OUT

Derivatives
These are secondary instruments (or securities) based on the performance of primary instruments. Derivatives, therefore, are more volatile (or exposed to bigger risk) eg., option, futures, swaps and securitisation.

Differential cost
A principle by which alternatives are compared highlighting the points of differences in costs by the adoption of such alternatives. This technique is used in export pricing, new products, and pricing goods sought to be promoted in new markets, either within the country or outside.

Discount cash flow
A method of evaluation by which cash flows of the future are discounted to current levels by the application of a discount rate with a view to reducing all cash flows to a common denomination and make comparison. Also a method of investment appraisal under which today's cash outflows are compared with today's cash inflows.

Efficiency variance
The difference between the standard time set and the actual time taken on an operation.

Extra dividend
A dividend paid in excess of a previously maintained annual rate, without assurance that the additional payment is to continue, also called special dividend.

Financial ration
Relationships between any two selected items of financial or business data based on different items at that figure in the profit and loss account and the balance sheet. Financial ratios indicate the casual relationship between factors that influence the financial performance of a business enterprise. These ratios are variously classified such as structural and functional ratios, ratios indicating causes and ratios indicating effects.

Floating asset
Assets such as cash, stock, bills of exchange, which are continually changing as appeal to fixed assets such as premises, plant and machinery and others.

Funded debt
Debt that is evident by outstanding bonds or long term notes or securities. Floating and funded debt constitute total liabilities to outsiders.

Group depreciation
Depreciation for similar items of assets with approximately the same useful life taken together. For instance, machine tools, plant and machinery in chemical industry, office equipment.

Holding company
A company is a holding company of another if, but only if, that other is its subsidiary as defined.

Human resource accounting
Accounting for the human resources of an enterprise (subject to adjustments) in the final statement of accounts.

Inflationary gap
The excess of income spending over that required to keep the factors of production fully employed. In other words, a situation in which the pressure of demand tends to raise the price level.

Source: ICWAI