Goodwill:

The benefit or advantage of good reputation of business, which a buyer is ready to pay the seller in response of good business reputation. It is calculated as Total Assets - Total Liabilities  (Total liabilities = External liabilities + Internal liabilities) e.g
              Total Assets        =   US$ 1000
              Total Liabilities    =   US$   600
              Net Assets value =   US$   400
 But the buyer is ready to pay the seller the amount of US$ 600 the difference between the buying price and net assets value US$ 200 is goodwill. It is written in the balance sheet as an intangible asset.

They buyer will make the following entry:-
     Total Assets          1000
     Good will                200
               Total Liabilities          600
               Capital (Net asset)    400
               Cash                         200

There are three methods of calculating the goodwill:-
1)  Average Profit Method.
2)  Super Profit Method.
3) Capitalization.

AVERAGE PROFIT METHOD. 
This is most simple method of calculating goodwill. First of all average of profit is calculated on the basis of few past years and then the result (average) is multiplied by number as 2, 3, 4, etc as agreed between both parties (seller & buyer). For example the profit of 5 years is as follow:- 20000+30000+15000+35000+20000= 120000/5 = 24000
Goodwill will be 24000 x 3 = 72000

SUPER PROFIT METHOD.
Super profit is the above of actual average profit over normal profit. Above profit means the amount which can be earned if the capital of the business was invested any other place with similar risk. Here we use super profit to calculate goodwill instead of average profit. For example you invested US$ 100000 and you can earn profit at the rate of 10% your normal profit will be US$ 10000 while your average profit is US$ 15000 then the super profit will be average profit less normal profit say 15000 - 10000 = 5000
Goodwill = 5000 x 3
We multiply super profit with 3 suppose it is agreed between seller & buyer, the 3 may be 2, 4 or 5 etc but as agreed.

CAPITALIZATION METHOD.
Here we calculate goodwill by using the following formula:-
Average profit multiply by 100 divides by %age of market rate of return.
SUPPOSE:-
Average profit                        =      25000
Market rate of return              =         16%
Capital of the firm                   =    150000
Capitalization using the formula  = 25000 x 100 / 16     =  156250
GOODWILL                           = Capitalization - Capital
                                                =      156250    -  150000   = 6250


FEEDBACK ABOUT ANY MISTAKE WILL HIGHLY BE APPRECIATED.


 

Goods or Merchandises:

Something that has been purchased or manufactured by the trader for resale purpose is called goods or merchandises e.g you deals in sugar and for this purpose you bought sugar, this sugar will be called goods or merchandises.

Going Concern Concept:

In this concept it is assumed that business will remain in continue for an indefinite time period, there is no plan to liquidate the business in the foreseeable future.

Fluctuating Capital:

The capital account of partners which do not remain constant. In this method entries relating to interest on capital, interest on drawings, or partners salaries are passed through capital accounts of partners.

Financial Statements:

The statements that show the financial position of the business entity is known  as financial statements e.g Cash flow statement, Trading & Profit & Loss A/C, Balance Sheet.

Factitious Assets:

The assets having no market value is called factitious assets e.g preliminary expenses, loss on issue of shares, bonds etc.

Fixed Liabilities:

The liabilities which are repayable after a long period of time is called fixed liabilities e.g bonds, loans etc.

Fixed Assets:

The assets which are having long life and are used in business for long period of time e.g Land, Building, Vehicle, Furniture & Fixture etc.

Error of Casting:

An error which is made during making the total of an account e.g we made total more or less instead of actual.

Error of Principle:

Error which is made in the fundamental principles of accounting is called error of principle. e.g we bought machinery and we record in purchase account instead of machinery account.

Error of Trial Balance:

An error which is made during the preparation of trial balance is called error of trial balance.

Error of Book Keeping:

An error which is made in the original books of account or in original documents is called error of book keeping.

Error of Posting:

If amount is posted on the wrong side of same account is known as error of posting e.g we sold goods to Aslam and we post the sale amount on the credit side of Aslam account instead of Debit side.

Error of Commission:

If a transaction is recorded in wrong account instead of right account of same class, is known as error of commission e.g we sold goods to Naveed and record in Zahid account.

Error of Omission:

If a transaction totally omitted to record in the original books of accounts is called error of omission e.g if we purchase some merchandise and we omit to record this transaction in the books it will be called an error of omission.

External Liabilities:

The amount that is payable by the business to the outsiders is called external liabilities.

Endorsement of the Cheque:

If the holder of cheque transfers the cheque to creditor against settlement of his debts the process is called endorsement of the cheque.

Endorsement of Bill:

If one bill is transferred from one person to another person for the settlement of loan or debts is called endorsement of bill.

Entry:

Recording of a transaction in a proper way in the accounting books of an organization.

External Transaction:

A transaction which is taken place with individual or corporation outside the organization.

Equity:

This is the sum of two components
1) Liabilites
2) Owner's Equity

We may write this in equation also as                          Equity = Liabilities + Owner's Equity

Expenses:

The cost which is spend on goods or services for the object of to earn revenue e.g Salaries, rent, entertainment, travelling etc.

Depletion:

The decrease in the value of wasting assets in proportionate to the quantum of production e.g quarries, oil well, etc.

Deferred Revenue Expenditures:

Revenue expenditures, the benefits are not confined to one accounting year. They extend to future accounting year or years are known as deferred revenue expenditures.

Doubtful Debts:

If the recovery of debts is uncertain or doubtful is known as doubtful debts.

Depreciation:

The decrease in the monetary value of an asset with the passage of time because of its use in business is known as depreciation.

Direct Revenue:

The revenues that are generated in the routine activities are called Direct Revenue e.g sale of goods.

Direct Expenses:

The expenses which are directly related with the purchase of goods are called direct expenses e.g freight, wages, power etc.

Deferred Liabilities:

The debts which are repayable in less than one year but more than one month is called deferred liabilities.

Double Column Cash Book:

A cash book containing two columns of amount are provided on each side of cash book one is for cash and other is for bank.

Dishonor of Cheque:

The amount of deposit in Bank account may be less than the amount of cheque drawn, or there may be difference in figure or words, or difference in signature of account holder, the bank may refuse to pay the amount of cheque to the holder of cheque. This is called dishonor of cheque.

Dishonor of Bill:

If the acceptor of bill of exchange refuses to pay the amount of bill of exchange on its maturity to the holder is called dishonor of bill.

Days of Grace:

The three additional days that's are provided to drawee by the drawer for payment of Bill of Exchange.

Debtors Ledger:

This is a register that contain the accounts of all customers to whom goods have been sold on credit.

Drawee:

The person to whom Bill of Exchange is drawn is called Drawee.

Drawer:

The person who draws bill of exchange is called drawer.

Debit Balance:

The debit side of an account is heavier than credit side, the difference is called debit balance.

Double Entry System:

A system in which both the changes in a transaction are recorded, one change in debit side and one change is in credit side with equal amount.

Dual Aspect Concept:

Dual Aspect Concept is that for every debit, there is an equivalent credit.

Drawings:

The cash or goods taken from the business by the owner for his own use is called drawings.

Debtors / Account Receivable:

Debtors are the customers to whom goods are sold on credit basis and from whom the money is received in near future. These are also called Account Receivable.

Capital Reserve:

Profit generated from non normal sources of business is called capital profit, reserve/s created out of this profit is called capital reserve.

Cost Price of an Asset:

Total of all expenses involved in carrying + installing the asset.

Capital Fund:

Excess of total assets over total external liabilities of a non profit making organization is called capital fund.

Compensating Errors:

The errors which are occurred with the same amount on both side of two or more accounts and cancelled the effect of error is called compensating errors.

Capital Payment:

The amount which is paid on account of capital expenditure is called capital payment e.g a machinery is purchased for US$ 10000, Freight for this Machinery is paid US$ 100 the total US$ 10100 is capital payment.

Capital loss:

Loss suffered by a business on the sale of fixed assets e.g an asset is purchased for US $ 10000 while later on it sold for US $ 9800 the difference of US $ 200 is capital loss.

Capital Profit:

Profit which is earned on the sale  of fixed assets e.g an asset having cost US $ 10000 and it is sold in US $ 10200 the difference of US $ 200 is capital profit.

Capital Receipts:

Receipts which are not re-recurring by nature and the benefits of those are enjoyed over a long period are called capital receipts e.g capital invested by owner, sale of proceeds of fixed assets.

Capitalized Expenditures:

Some expenditures although of revenue nature basically are directly connected with fixed assets and spent directly on the acquisition of fixed assets. Such expenditures are added to the cost of the assets and are called capitalized expenditures e.g Freight paid for newly bought machinery.

Contingent Liabilities:

The liabilities which are not liabilities at present but may or may not become liability in future. these depend upon certain future event or events.

Current Liabilities:

The debts which are repayable within  one year are called current liabilities e.g Creditors, Accounts Payable, Bank Overdraft etc.

Current Assets:

Assets that can be converted into cash quickly to meet the short term liabilities are called Current Assets. e.g Cash, Bank A/C, Stock, Account Receivable etc

Closing Entries:

At the end of accounting period, accounts relating to expenses and incomes are closed by transferring their balances to Trading and Profit and Loss Account. These types of entries are called closing entries.

Contra Entry:

An entry in which both cash and bank accounts are involved and it is recorded on both sides of cash book.

Cash Account:

An account of ledger in which only cash transactions are posted from cash book or cash journal is called cash account.

Cash Book:

A book in which all cash transactions are recorded is called cash book. No credit entries are involved in cash book. It is also called cash journal.

Credit Balance

An account having credit side heavier than debit side the balance is called credit balance.

Compound Entry:

An entry in which more than one accounts are debited or credited is called compound entry.

Credit Transaction:

If the payment is not made immediately in cash for the value received is called Credit Transaction e.g Vehicle bought on account or on credit. In this payment is made in future.

Cash Transcation:

If the payment is made immediately in cash for the value received is called cash transaction e.g Vehicle purchased for cash.

Cost concept:

Under this " an asset is recorded in the accounting record  on the basis of price paid to acquire it."

Cost Accounting:

The basic object of this is to determine the cost of goods manufactured or produced by the business entity.

Creditors / Accounts Payable:

These are those persons from whom goods have been purchased or services have been received on credit basis and to whom payments are made to them in near future. These persons are also called Accounts Payable.

Bad Debts:

The debts which are not recoverable from the debtors are called bed debts.

Balance Sheet:

It is a statement that shows the financial position of the business entity on a particular date. It is a statement of Assets, Liabilities and capital.

Bank Reconciliation Statement:

If there is any discrepancy arises between the balance of the Cash Book and that of Pass book, the depositor prepares a statement to explain the causes of discrepancies and to reconcile the two balances. This statement of explanation is called Bank Reconciliation Statement.

Bank Overdraft:

The amount which is excess withdrawn by the customer than his deposits in his bank account.

Balance:

The difference of both sides of an account is called balance.

Balancing:

The process of equalizing the both sides of an account.

Amortization:

The decrease in the value of intangible assets such as copy rights, patents etc.

Admission Fee:

The amount which is paid by a new member at the time of entering in addition of his subscription.

Administative Expenses:

Expenses which are related with the office or administration e.g office salaries, office rent, entertainment, travelling & conveyance etc.

Abnormal Loss:

Loss which is not due to normal reasons. e.g Loss by fire, flood, theft, etc.

Allowances for Uncollectable or Doubtful Debts:

The provision, which is maintain for noncollectable debts in future is known as provision or allowances for doubtful or uncollectable debts.

Adjustment:

Some time during recording the transactions in original books of accounts some mistake occurs, to make correct these record of a transaction which has not be entered or which has been entered but in an incomplete or wrong way adjustments are made.

Accounting Cycle:

Transaction                Journal            Ledger          Trial Balance            Final Accounts

Adjusting Entries:

When final accounts are prepared, some items of income and expenses require adjustments. e.g prepaid expenses, accrued expenses, unearned income, accrued income etc. These adjustments are necessary to draw accurate profit.

Accommodation Bills:

Accommodation bills are drawn and accepted without any sale or purchase of goods, the main purpose of accommodation bills are to provide financial help to one party or both parties.

Accounts:

Account is the individual record of Assets, Liabilities, Expenses, Income and capital in a summarized manner.

Accounting Period Concept:

According to this concept the life of the business is divided into series of relatively short accounting periods of equal lengths just to know the results of the business for specific period.

Capital

The amount invested by the owner in the business is called Capital.

Cash Discount

It is the deduction which is given by the creditor to the debtor, if the amount is paid before the due date. e.g a buyer bought some commodity of US$ 100 from the seller and seller offer him 2% discount if the buyer pay him within 10 days from the buying date and buyer pay his dues to the seller within 10 days the seller settle his account with US$ 98 and US$ 2 will be the amount of Cash Discount

Accountancy

The accountancy is far extensive than book keeping. In Book keeping only transactions are recorded in original books of business while in accountancy these records are analyzed by professional accountant. e.g whether business earns profit or face loss, what is financial position of the business, what is net profit ratio to assets etc.

Business

A legal activity which is done to earn profit. The activities which are not done for the purpose of earning profit are not called business. For example if an individual made furniture for his own use, this activity is not included in business.

Cash System of Accounting.

It is an accounting system in which entries are recorded only when cash is received or paid.

Book Keeping

Book keeping is the art of recording monetary transactions in original books of business entities.