Basic Accounting Terms

Basic Accounting Terms

There are certain basic accounting terms which are daily used in business world.

These basic terms are called accounting terminology. It is understand the meaning

 of these terms or words                     

Business:-

Any types of activities done to earn money or to make a  profit

 is called business.

Types of business:-

There are three types of business:-

1) Manufacturing Business 2) Trading Business 3) Service Business

1) Manufacturing Business:-

            Which business use component, parts or raw material to make a finished goods then finished goods is sold to the customer or consumers is called Manufacturing Business.

Example:- Rice mills, Toy Factory, Brick Making Business etc.

2) Trading Business:-

These types of business never manufacturing the finished goods. They always buy finished goods from manufacturer and sales to the customer or consumer and make a profit. Example:- Laxmi General Stores, Kaushal Books shop, Chaudhary Vastralaya etc.

3) Service Business:- 3) Servicing Business:-

These types of business only gives service to the customers

Example:- Doctor’s Clinic, Lower Office, School, College, University etc.

Transaction:-

            Transactions are business events which related to money and measures in term of money.

Types of business Transaction:-

There are two types of business transaction:-

i)                    Cash Transaction

ii)                  Credit Transaction

I)  Cash Transaction:-

In this transaction payment done at the time of purchases or sales.

II) Credit Transaction:-

In this transaction first purchases or sales then after some time payment is done.

Capital:-

Capital is the amount invested by the proprietor in a business.

Types of capital:-

 There are two types of capital:

i)                    Fixed Capital

ii)                  Working Capital

Fixed Capital: - The amount invested in fixed assets is called fixed capital.

Working Capital: - That part of capital is available for day-to-day working of the                  

                                 business is called working capital.

Drawing:-      

   Proprietor withdrew cash, goods and assets from the business for domestic use is            called Drawing.

Assets:-

            Assets are the source which benefit the future.

Example:- Machine, Building, Computer, Stock of goods and Debtors etc.

Types of assets:-

Assets are classified into the following categories:

i)                    Fixed Assets

ii)                  Current Assets

iii)                Tangible Assets

iv)                Intangible Assets

v)                  Wasting Assets

vi)                Liquid Assets

Fixed Assets :-

            Fixed assets are assets which are intended to remain in business for use for a long period of time and not intended for sale.

Example: - Land, Building, Machine, Furniture, Computer, and car etc.

Current Assets :-

Current assets are conversion into cash within a short period of time or within under 12 months

Example: - Cash in hand , Cash at bank, Stock in trade, Sundry Debtors, Bills Receivable etc.

Tangible Assets :-

Tangible assets are those assets which have physical existence means which can be seen and touch.

Example: - Cash in hand, Cash at bank, Stock in trade, Building, Furniture and Bike etc.

Intangible Assets :-

Intangible assets are those assets which do not have physical existence, but have money value.

Example: - Goodwill, Patents, Copyrights, Trade Mark etc.

Wasting Assets :-

Wasting assets are those assets which get exhausted or reduced through being worked or used Example: - Mines, Oil-wells, Quarries etc.

Liquid  Assets :-

Liquid assets are those current assets which are either in the form of cash or which can be converted into cash quickly.

Example: - Cash in hand, Cash at bank, Bills Receivable and Temporary Investments etc.

Liquid Assets = Current Assets – (Stock + Prepaid Expenses)

Liabilities:-

Liability is the financial obligation of an enterprise other than owner’s funds. It has to be paid at some time in future.

Liabilities = Assets - Capital

Types of Liabilities:

          There are two types of liabilities:

i)                    Fixed Liabilities (Long-term Liabilities)

ii)                  Current Liabilities (Short-term Liabilities)

i)                    Fixed Liabilities :-

                    Which liabilities repaid after a long period of time is called long-term liabilities or Fixed liabilities. These types of liabilities generally repaid after 12 months

Example: - Debenture, Car loan and all type of long-term-liabilities etc.

ii)                  Current Liabilities: -

                   Which liabilities repaid within a short period, normally within a year is called Current liabilities.

 Example:- Bill payable, Sundry Creditors, Bank Overdraft, Short-term-Loan and Outstanding Expenses etc.

Purchases:-

            Goods purchased by the business are called purchases.

Types of purchases:-

            There are two types of purchases:

i)                    Cash Purchases

ii)                  Credit Purchases

Cash Purchases: -

Goods purchased and paid cash at the time of purchases is called cash purchases.

Credit Purchases: -

Goods purchased but cash note paid at the time of purchases and repaid after some time is called Credit purchases.

 Purchases Returns: -

            When purchased goods return to the supplier is called purchases returns or Return outwards.

 Sales:- 

            When goods sales to the customer is called Sales.

 Types of Sales:- 

            There are two types of sales:

i)                    Cash Sales

ii)                  Credit Sales

Cash Sales:-

        When goods sold to customer and cash received at the time of sale is called cash sales.

Credit Sales:-

        When the goods sold to the customer and the customer pay money after some time is called credit sales.

Profit:-

            It is general term for the excess of revenue over related cost. When the result of this computation is negative, it is referred to loss.

Profit may be gross profit and net profit.

 Loss:-

            Loss is defined as money or money’s worth given up without any benefit in return. It can also be defined as any expenditure in return for which no benefit is received. Loss of cash by theft, loss of goods by fire, damages paid to others etc. are examples of losses. Loss may be normal or abnormal.

Voucher:-

A written document in support of a business transaction is called a voucher. It is on the basic of vouchers that business transaction are recorded in the books of account.

Discount:-

 It is deduction or an allowance from the price of goods made by the seller to the seller to the buyer.

Types of Discount:-  

There are following types of discount:-

i)                    Trade Discount

ii)                  Cash Discount

iii)                Special Discount

Trade Discount:-

Trade discount is allowed by the manufacturer to the whole seller or whole seller to the retailer. Trade discount is allowed on the list price of the goods. It is deducted from the total value of goods sold.

Cash Discount:-

Cash discount is allowed on the amount of the bill for ready cash payment or if the payment is made within a specified time.

Special Discount:-

Some time the seller allows the special reduction in prices to the customers. Such special reduction in prices is known as special discount.

Entity:-

An entity is any person or group of persons sharing a common purpose. For example- a manufacturer, a sole trading concern, a partnership firm, a company, a customer, government etc. These are all entities

Business Entity:-

Business entity means a specific identifiable business enterprise like Super Bazar, Big Bazar, TELCO, TISCO, B.S.N.L. etc.

Equity:-

The term equity denotes liabilities and capital. It is two types :

i)                    Outsider’s equity

ii)                  Owner’s equity

Outsider’s Equity:-

            It is nothing but liabilities of outsiders.

Owner’s Equity:-

            Owner’s Equity means owner’s capital.

Entry:-

 The record of transaction made in any book of account, either in the book of Original Entry. Example:- Journal, Ledger or in any subsidiary book

Books of Accounts:-

Books of account refer to suitably ruled account books in which business transaction are recorded.

There are two main types of books of accounts maintains in the business:

i)                    Journal Books

ii)                  Ledger Books

 Followings are the sub-books of accounts:

i)                    Cash Books

ii)                  Purchases Books

iii)                Purchases Returns Books

iv)                Sales Books

v)                  Sales Returns Books

vi)                Bills Receivable Books

vii)              Bills Payable Books

viii)            Journal Proper

   Expenses:-

It means the amount spent on the cost of the goods and services used up in the process of earning revenue. An expense also refers to an expenditure in return for which benefit is received. Expenses reduce capital. Example: - Cost of goods sold, salaries, printing and stationary, payment of rent, interest, commission, electric charges etc.

Incomes:-

The different between revenue and expenses is called income.

 Example: - Goods costing ₹ 1,00,000/- are sold for ₹ 1,50,000/-

	Income = Sales – Cost                    50,000 = 1,50,000 – 1,00,000/-

 

Expenditure:-

Expenditure denotes any payment made to obtain assets, goods or services or transfer of assets. Expenditure are two types:

i)                    Capital Expenditure

ii)                  Revenue Expenditure

Capital Expenditure:-

Which expenditure refers long period benefit to the business is called Capital Expenditure. Example:- Purchases of Land and Building, Machinery and Vehicles etc.

Revenue Expenditure:-

Which expenditure refers quickly benefit to the business is called Revenue Expenditure. Example: - Payment of Rent, Salary, Commission, Interest, Wages, Electricity Bills and Trade Expenses etc.

Revenue:-

Revenue Expenditure refers to the earning of the business. Revenue means regular income. It increase the capital of the business.

Debtor:-

Debtor means Customer of the business. Business sales goods to the customer on the credit. A debtor is a person who owes money to the business.

Creditor:-

Creditor means supplier of the business. Business purchases goods from the supplier on the credit. A creditor is a person to whom the business owes money.

Goods:-

Which things are used to trade in the business is called goods. The goods performed main role in the business. Example: - In furniture shop “Furniture” is  goods

      In cloth shop “Cloth” is goods

Stock:-

            The value of unsold goods in the business is called stock. It is also known as “Stock-in-hand”

There are two types of stock:

i)                    Opening Stock

ii)                  Closing Stock

 Opening Stock:-

            Stock-in-hand at the beginning of the financial years is called Opening-stock.

 Closing Stock:-

            Stock-in-hand at the ending of the financial year is called Closing-stock.

 Inventory :-

            Inventory means list of goods in the business stock. The inventory include all the following activities:

i)                    How many goods are purchases, sale and balance rest in the stock?

ii)                  Stock details: Items, Quantity, Rate, Amount and other etc.

iii)                In factory: Record raw material and finished goods in the inventory reports

iv)                How many raw materials are used in manufacturing of finished goods?

v)                  How many finished goods are manufactured and sold in the factory?

 Receivables:-

Receivable include all the outstanding amount due from others.

Account Receivable = Debtors + Bills Receivable

Payable:-

            Payable include all the due to others.

Account Payable = Creditors + Bills Payable

 Accounting: -

            Accounting is the art of recording, classifying and summarizing of the business transaction. It is also known as language of business.

 Accounting Principles:-

The accounting principles are a set of rules and guidelines used in accounting. Accounting principles when accepted by accountants all over the world are known as “Generally Accepted Accounting Principles (GAAP).

Features of Accounting Principles:-

Accounting principle are the rules which are based on customs, usages and traditions. All accounting practices are based on accounting principles.

I)                   Accounting Principles are Man-made.

II)                Satisfying Three Parameters: Usefulness/Relevance, Objectivity, Feasibility

III)             Difference in the Use of principle.

IV)             Lack of list of accounting principle

Accounting Concepts:-

Accounting concept refers to the basic assumptions, rules and principles which work as the basis of recording of the business transactions and preparing accounts.

Following are accounting concepts:-

1.      Business Entity Concept

2.      Going Concern Concept

3.      Money Measurement Concept

4.      Accounting Period Concept

5.      Cost Concepts

6.      Dual Aspect Concept

7.      Matching Concept

8.      Revenue Recognition/ Realisation Concepts

9.      Accrual Concept

10.  Full Disclosure Concept

11.  Consistency Concept

12.  Conservatism or Prudence Concept

13.  Materiality Concept

Source Documents of accounting:-

            Source documents are the documents on the basis of which transactions are recorded in the accounts books.

            Source documents contain all the required information of the transaction. These documents are known as Vouchers.  

Following are accounting books with related source of documents

S.N.	Name of book	Related source documents
01	Cash Book	Cash Memos, Cash Receipts issued or Cash Receipts Received, Vouchers
02	Purchases Book	Purchases Invoice from Suppliers
03	Sales Book	Sales Invoice issued to the customer
04	Purchases Returns Book	Debit notes issued to the Suppliers Credit notes received from Suppliers
05	Sales Returns Book	Credit notes issued to the customers Debit notes received from the customers

Vouchers:-

            Source documents are called Vouchers. A voucher is documentary evidence in supporting of a transaction. Example: - Cash memos, Debit notes, Credit notes, Purchases Invoice, Sales Invoice etc.

 Types of Vouchers :-

            Followings are the types of vouchers:

i)                    Supporting Vouchers/Source Voucher

a)      External Supporting Vouchers

b)      Internal Supporting Vouchers

ii)                  Accounting Vouchers

a)                  Cash Vouchers

1.      Debit voucher cash Payments

2.      Credit voucher for cash Receipts

b)         Non-cash Vouchers or Transfer Voucher

                        1. Invoice Bill

                        2. Debit Note

                        3. Credit Note

Note: - All voucher is serially numbered and date with sign.& seal.