Basic Accounting Terms

                                                 

1.      Business Transaction:- Business transaction is an economic activity of the business, which changes its financial position. It involves exchange of goods or services for money consideration. A transaction has two aspects, a Debit and a Credit of equal amount. A transaction may be a cash transaction or a credit transaction. Transactions may be divided into two parts:

·         External Transactions- Transactions between firm and other party are called external transactions.

·         Internal Transactions- Transactions within the same business entity are called internal transactions.

2.      Account:- Account is a summarised record of related transactions at one place under a particular head. For example all transactions relating to cash are recorded at one place, known as Cash Account. An account has two sides. Left sided of an account is Debit, abbreviated as Dr. and right side of an account is Credit abbreviated as Cr. Following is the format of an account.

3.  Capital:- Capital is the amount invested by the owner in the business. It may be in form of cash or assets having a monetary value. According to ‘Business Entity Concept’, business is considered to be separate and distinct from its owners. So, capital is a liability of the business towards the owner. Capital is the excess of assets over outside liabilities, i.e. Capital = Assets – Liabilities. Capital is also known as Owner’s Equity or Net Worth or Internal Liability or Proprietor’s Fund.  

4.      Drawings:- Withdrawal of money or goods by the owner from the business for personal use is known as drawings. It reduces the capital of the owners.

5.      Liabilities:- Liabilities are obligations or debts that an enterprise has to pay at some time in the future. It is the amount owed by the business. We may express it as, Liabilities = Assets – Capital. Liability may be classified as:

(a)   Current Liability- A liability is classified as a current liability when it satisfies any one of the following conditions-

·         It is expected to be settled in company’s normal operating cycle.

·         It is due to be settled within 12 months from the date of Balance Sheet.

·         It is held for the purpose of being traded.

Operating cycle means the time between the acquisition of assets for processing and their realisation in cash or cash equivalents. If the operating cycle cannot be identified, it is assumed to have duration of 12 months.

(b)   Non-Current Liability- A Non-Current Liability is a liability, which is not classified as Current Liability.

6.      Assets:- Assets are economic resources of an enterprise, which can be expressed in terms of money. There are four main characteristics of an assets:

·         It should be owned by the business.

·         It should have some value attached to it.

·         It should have been acquired at a measurable money cost.

·         It may be in tangible or intangible form.

Assets can be further classified as:

(i) Current Assets: Current Assets are those assets which are held by the business with the purpose of converting them into cash within one year.

(ii) Non-Current Assets: Non-Current Assets are those assets which are held for long-term use in the business and are not meant for resale.

Fixed Assets: Fixed Assets are those Non-Current Assets which are held for use in the business and are not meant for resale. Fixed assets are further classified as:

(a) Tangible Assets: Tangible Assets refer to those assets which have physical existence. Example- Plant and Machinery, Land and Building etc.

(b) Intangible Assets: Intangible Assets are those assets which do not have a physical existence. Example- Goodwill, Trademarks etc.

Fictitious Assets: Fictitious assets are those assets which neither have any real value nor have any physical form, but are called assets on the basis of legal grounds. These assets are neither tangible assets nor intangible assets. Example- Advertisement Suspense Account etc.

7. Receipts:- Receipts refer to the amounts received or receivable by the business organisation from selling assets, goods or services. Receipts are of two kinds:

          (i) Revenue Receipts: Revenue receipt refers to amount received or receivable by the business entity on regular basis from the operation of its business.

         (ii) Capital Receipts: Capital receipt refers to the amount received or receivable against transactions which are not revenue in nature.

8. Expenditure:- Expenditure refers to the amount or liability for acquiring assets, goods or services. Expenditure can be further classified as:

               (i) Capital Expenditure: It refers to an expenditure incurred for acquiring or increasing the value of existing fixed assets.

              (ii) Revenue Expenditure: It refers to an expenditure incurred during an accounting period and the benefit of which is also exhausted within the same accounting period.

9. Expense:- Expense is the cost incurred in producing goods and services for selling purpose.

10. Income:- Income is the surplus of revenue over expenses. It is the profit earned during a period.

                                          Income = Revenue – Expense

11. Profit:- Profit is the excess of total revenues over total expenses of a business enterprise for an accounting period. Profit is categorised as Gross Profit and Net Profit.

                  (i) Gross Profit: Gross Profit is the difference between sales revenue over cost of goods sold or services rendered.

                  (ii) Net Profit: Net Profit is the profit earned after subtracting all expenses. If expenses are more than the revenue, then it is Net Loss. 

12. Gain:- Gain is a monetary benefit, profit or advantage that arises from transactions, which are incidental to business.

13. Loss:- Loss is the excess of total expenses over total revenue.

14. Purchases:- Purchases refer to the amount of goods bought by a business for resale or for use in the production.

15. Purchases Return or Return Outward:- When purchased goods are returned to the seller due to some reason like not according to specifications or due to some defect, then it is termed as Purchases Return.

16. Sales:- Sales refer to the amount of goods sold that are already bought or manufactured by the business.

17. Sales Return or Return Inward:- When sold goods are returned by the purchaser due to some reason, then it is termed as Sales Return.

18. Stock or Inventory:- Stock or inventory refers to the value of goods remaining unsold at the end of the accounting year with the business entity. Stock is always valued at cost price or market price whichever is less, based on principle of prudence. Closing stock of this year becomes the opening stock of next accounting year.

                  Types of Stock

·         Stock of Raw Material

·         Stock of Semi-Finished Goods or Work-in-Progress

·         Stock of Finished Goods

19. Trade Receivables:- The term Trade Receivables has been used in the revised schedule VI to the Companies Act, 1956 and now in Companies Act, 2013 to represent both debtors and bills receivables for the first time.

      Debtor- Debtor is a person or a firm to whom goods have been sold or services rendered on credit and payment has not been received.

      Bills Receivable- A bill of exchange is drawn by the seller (drawer) on the buyer (drawee), in which the seller directs the buyer to pay the specified amount at a specific future date. A bill of exchange becomes bill receivable for the seller after getting the acceptance of the buyer.

20. Trade Payables:- The term Trade Payables has been used for the first time in revised schedule VI to the Companies Act, 1956 and now in Companies Act, 2013 to represent both creditors and bills payables.

      Creditors- Creditor is a person or a firm to whom goods have been purchased or services have been taken on credit and payment has not been made.

      Bills Payables- It refers to a bill of exchange accepted by the person who has purchased goods on credit.

 21. Goods:- Goods refers to the products in which the business is dealing.

 22. Cost:- Cost is the total expenditure incurred or chargeable to a specified product or activity.

 23. Voucher:- Voucher is a documentary evidence in support of a business transaction.

 24. Discount:- Discount in any type of reduction in the price by the seller to the buyer. Discount is of two types-

      (i) Trade Discount: Trade discount is the rebate allowed by the seller at a fixed percentage of the list price or catalogue price. It is not recorded in the books as it is deducted from the sale price.

      (ii) Cash Discount: Cash discount is the rebate allowed to the buyer for making prompt payment or to make payment within the specified time. It is always recorded in the books of accounts. It is of two types-

                  (a) Discount allowed: If cash discount is allowed to debtors to induce them to make prompt payment.

                  (b) Discount received: If the cash discount is received by the creditors for making prompt payment of goods bought.

25. Proprietor:- Proprietor is a person who makes investment in the business, manages it and bears all the risk involved in the business.

26. Entity:- An entity refers to an economic unit, which is engaged in performing economic activities.

27. Entry:- The recording of transaction in the books of account is called an entry. Transaction should be supported by a voucher.

28. Debit and Credit:- Under the Double Entry System, every business transaction is recorded in at least two account namely Debit and Credit. The left hand side of an account is known as Debit and the right hand side of an account is known as Credit. Dr. stands for debit and Cr. stands for credit.

29. Live Stock:- Animals like horse, ox, camel etc are used in transporting goods from one place to another by attaching them in cart. Thus, living animals are termed as live stock in business transactions.

30. Invoice or Bill:- Invoice or Bill is a business document, which is prepared by the seller when the goods are sold on credit.

31. Allowance:- If some reduction sales price is given to a customer due to some minor defect in the product, it is called allowance.

32. Bad Debts:- Bad Debt is the amount that has become irrecoverable from a debtor.

33. Book Value:- At the end of the accounting period, fixed assets are shown in their cost less depreciation. This is called book value of these assets.

34. Depreciation:- Depreciation refers to decline in the value of fixed assets.

35. Solvent:- Solvent is a person or an enterprise which is in a position to pay its debts in full.

36. Insolvent:- Insolvent is a person or an enterprise which is not in a position to pay its debts in full.