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/-
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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.
Our thinking power depends on words. So storing of words to understand with meaning
ReplyDeletegood
ReplyDeleteok thanks.................
DeleteStarted business with cash Rs 5,00,000. How to pass journal entry?
ReplyDeleteCash a/c ..............Dr. 5,00,000
ReplyDeleteTo Capital a/c 5,00,000
(Being business started with cash. )
Nice
ReplyDelete