IRFC Assistant (Finance) key terms

A method of recording revenue when it is earned and expenses when they are incurred, regardless of when cash actually changes hands. It matches costs against the income they helped generate.

The accounting rule that expenses should be recognised in the same period as the revenues they helped produce. It prevents profits from being overstated by shifting costs to later periods.

The systematic allocation of the cost of a tangible fixed asset over its useful life. It spreads the expense across periods that benefit from the asset rather than charging it all at purchase.

The value at which an asset or liability is recorded in the books after deducting accumulated depreciation, amortisation, or impairment. Also called book value.

A reduction in the recoverable value of an asset below its carrying amount, requiring a write-down in the accounts. It reflects that the asset will no longer generate the expected future economic benefits.

A liability of uncertain timing or amount recognised when a present obligation exists and a reliable estimate can be made. Common examples are warranty claims, legal disputes, and expected credit losses.

A possible obligation whose existence depends on uncertain future events, or a present obligation that cannot be reliably measured. It is disclosed in notes rather than recognised in the balance sheet.

A statement listing all ledger account balances at a given date to check that total debits equal total credits. It detects arithmetic errors but not errors of principle or omission.

A temporary ledger account used to hold the difference when a trial balance does not agree. It is cleared once the underlying errors are located and corrected.

The original record of a transaction showing which accounts are debited and credited, with a brief narration. Every entry must keep total debits equal to total credits.

The bookkeeping system in which every transaction is recorded in at least two accounts, one debited and one credited, so the accounting equation always stays balanced.

The excess of current assets over current liabilities, representing funds available for day-to-day operations. Positive working capital signals short-term liquidity; persistent negative working capital signals stress.

The number of days between paying suppliers for inventory and collecting cash from customers. It combines inventory days plus receivable days minus payable days; a shorter cycle frees up cash.

The minimum return a company must earn on its investments to satisfy lenders and shareholders. It is usually the weighted average of after-tax debt cost and equity cost.

Weighted Average Cost of Capital: the blended cost of a firm's debt and equity, weighted by their share of total capital. It is the standard discount rate for evaluating projects of average risk.

The process of evaluating and selecting long-term investment projects using techniques such as net present value, internal rate of return, and payback period. It decides where scarce capital is deployed.

Net Present Value: the sum of a project's expected cash flows discounted at the cost of capital, minus the initial outlay. A positive NPV means the project adds value.

Internal Rate of Return: the discount rate at which a project's net present value equals zero. A project is acceptable if its IRR exceeds the required rate of return.

The use of borrowed funds to increase the potential return on equity, which also magnifies risk. High leverage raises fixed interest obligations and sensitivity of profit to changes in sales.

Total borrowings divided by shareholders' funds, showing how much of the business is financed by lenders rather than owners. A rising ratio indicates greater financial risk.

Current assets divided by current liabilities, measuring a firm's ability to meet short-term obligations. A ratio near or above 1.5 is generally comfortable, though norms vary by industry.

The practice of setting credit terms, monitoring collection, and controlling the level of outstanding customer dues. It balances sales growth from easy credit against the cost of blocked funds and bad debts.

Tax Deducted at Source: tax withheld by the payer at a prescribed rate when making specified payments such as salary, rent, or professional fees, and deposited with the government against the payee's PAN.

Goods and Services Tax: India's destination-based indirect tax on supply of goods and services, levied as CGST plus SGST for intra-state supplies and IGST for inter-state supplies, with input credit allowed.

The credit a registered taxpayer can set off against output GST for tax already paid on purchases used in the business. It removes cascading of tax across the supply chain.

Harmonised System of Nomenclature: a standard numeric classification for goods used to fix GST rates and reporting. Services use the parallel SAC (Services Accounting Code) classification.

Permanent Account Number: a ten-character alphanumeric identifier issued by the Income Tax Department to track a person's or entity's tax affairs and link financial transactions above prescribed thresholds.

The twelve-month period, beginning 1 April, in which income earned in the preceding financial year is assessed and taxed. It always follows the relevant previous year by one year.

The threshold at which an omission or misstatement could influence the economic decisions of users of financial statements. Auditors set materiality levels to plan the nature and extent of testing.

The risk that an auditor expresses an inappropriate opinion on financial statements that are materially misstated. It has components of inherent risk, control risk, and detection risk.

The policies, procedures, and systems a company uses to safeguard assets, ensure reliable reporting, and comply with laws. Segregation of duties and authorisation limits are core elements.

A control that separates authorisation, custody, and record-keeping so no single person can both commit and conceal an error or fraud. It is a fundamental preventive control.

A short-term money market transaction in which one party sells securities to another with a commitment to buy them back at a slightly higher price on a set date. The difference is effectively the interest.

Very short-term borrowing and lending between banks, typically overnight, used to manage daily reserve requirements. The call rate is a key indicator of liquidity in the banking system.

The total return an investor earns by holding a bond until maturity, assuming all coupons are reinvested at that same rate. It links the bond's current price, coupon, and face value.

A measure of a bond's price sensitivity to changes in interest rates, expressed in years. Longer duration means larger price swings when yields move.

Cash Reserve Ratio: the share of net demand and time liabilities that banks must hold as cash with the Reserve Bank of India. Raising it absorbs liquidity from the banking system.

The rate at which the Reserve Bank of India lends short-term funds to banks against government securities. It is the principal policy lever for signalling the direction of interest rates.

Interest calculated only on the original principal for the whole period, using the formula principal times rate times time. It does not earn interest on previously accrued interest.

Interest calculated on the principal plus interest already accumulated, so the base grows each period. It produces faster growth than simple interest over the same term and rate.

The principle that a rupee received today is worth more than the same rupee received later, because it can be invested to earn a return. It underpins discounting and present value calculations.