Chapter 2 : Basic Accounting Terms
Business Transaction
An economic activity that affect financial position of the business and can be measured in terms of money e.g., purchase of goods for use in business.
Account
Account refers to a summarized record of relevant transaction of particular head at one place. All accounts are divided into two sides. The left side of an account is called debit side and the right side of an account is called credit side.
Capital
Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner.
Drawings
The money or goods or both withdrawn by owner from business for personal use, is known as drawings. Example: purchase of car for personal use by withdrawing money from business.
Assets
Assets are valuable and economic resources of an enterprise useful in its operations. Assets can be broadly classified as:
1. Current Assets: Current assets are those assets which are held for short period and can be converted into cash within one year. For example: debtors, stock etc.
2. Non-Current Assets: Non-current assets are those assets which are hold for long period and used for normal business operation. For example: land, building, machinery etc. They are further classified into:
a) Tangible Assets: Tangible assets are those assets which have physical existence and can be seen and touched. For example: furniture, machinery etc.
b) Intangible Assets: Intangible assets are those assets which have no physical existence and can be felt by operation. For example: goodwill, patent, Trade mark etc.
Liabilities:
Liabilities are obligations or debts that an enterprise has to pay after some time in the future.
Liabilities can be classified as:
1. Current liabilities: Current liabilities are obligation or debts that are payable within a period of one year. For example: creditors, bill payable etc.
2. Non-current liabilities: Non-current liabilities are those obligation or debts that are payable after a period of one year. Example: bank loan, debentures etc.
Receipts
1. Revenue Receipts: Revenue receipts are those receipts which are occurred by normal operation of business like money received by sale of business products.
2. Capital Receipts: Capital receipts are those receipts which are occurred by other than business operation like money received by sale of fixed assets.
Expenses
Costs incurred by a business for earning revenue are known as expenses. For example: rent, wages, salaries, interest etc.
Expenditure
Spending money or incurring a liability for acquiring assets, goods or services is called expenditure. The expenditure is classified as:
1. Revenue Expenditure: If the benefit of expenditure is received within a year, it is called revenue expenditure. For example: rent interest etc.
2. Capital Expenditure: If benefit of expenditure is received for more than one year, it is called capital expenditure. Example purchaseof machinery.
3. Deferred Revenue Expenditure: There are certain expenditures which are revenue in nature but benefit of which is derived over number of years. For example: huge advertisement expenditure.
Profit
The excess of revenues over its related expenses during an accounting year is profit. Profit=Revenue-Expenses
Gain
A non- recurring profit from event or transaction incidental to business such as sale of fixed assets, appreciation in the value of an assets etc.
Loss
The excess of expenses of a period over its related revenue is termed as loss.
Loss= expenses —revenue
Goods
The products in which the business deal in. The items that are purchased for the purpose of resale and not for usein the business are called goods.
Purchase
The terms purchase is used only for the goods procured by a business for resale. In case of trading concerns it is purchase of final goods and in manufacturing concern it is purchase of raw materials. Purchases may be cash purchases or credit purchases.
Purchase Return
When purchased goods are returned to the suppliers, these are known as purchase return.
Sales
Sales are total revenues from goods sold or serviced provided to customers. Sales may be cash sales or credit sales.
Sales Return
When sold goods are returned from customer due to any reasons is known as sales return.
Debtors
Debtors are persons and/or other entities to whom business has sold goods and services on credit and amount has not received yet. These are assets of the business.
1. Trade discount : The purpose of this discount is to appreciate the, buyer to buy more goods. It is offered at an agreed percentage of list price at the time of selling goods. This discount is not recorded in the accounting books as it is deducted in the invoice/cash memo..
2. Cash discount : The objective of providing cash discount is to encourage the debtors to pay the dues. This discount is recorded in the accounting books.
Creditors
If the business buys goods/services on credit and amount is still to be paid to the persons and /or other entities, these are called creditors. These are liabilities for the business.Bill Receivable
Bill receivable is an accounting term of bill of exchange. A bill of exchange is bill receivable for seller at time of credit sale.Bill Payable
Bill payable is also an accounting term of bill of exchange. A bill of exchange is bill payable for purchaser at time of credit purchase.Discount
Discount is the rebate given by the seller to the buyer. it can be classified as:1. Trade discount : The purpose of this discount is to appreciate the, buyer to buy more goods. It is offered at an agreed percentage of list price at the time of selling goods. This discount is not recorded in the accounting books as it is deducted in the invoice/cash memo..
2. Cash discount : The objective of providing cash discount is to encourage the debtors to pay the dues. This discount is recorded in the accounting books.
0 Comments