The compilation of this Introduction to Accounting Notes makes students exam preparation simpler and organised.
Basic Terms in Accounting
In accounting, many technical words are commonly used. Therefore, it is essential to know their meaning, without which knowledge of accounting subject will be incomplete. Commonly used terms such as business, purchase, purchase return, trade, etc are explained here.
1. Business
Any legal action that is done in order to earn income or profit is called business. It includes the production of goods and services, purchase and sale of goods and services, banking, insurance, education transportation, and any other trading activity, etc.
Capital = Assets – Liability
2. Trade
Purchase and sale of goods and services in order to earn a profit are called trade.
3. Profession
Any work is done in order to earn profit which necessarily requires prior training and education is called a profession. For example doctors, lawyers, engineers, etc…
4. Proprietor
The person who invests capital in the business and is entitled to have all profits and losses of the business is called proprietor or owner of the business. The nature of the proprietor depends upon the type or nature of the business organization. In a sole trade business, a sole trader is a proprietor, in a partnership firm, partners or proprietors, and in company shareholders are proprietors.
5. Capital
The amount of cash, goods, or assets which is initially invested by the proprietor while commencing a business is called capital. It is invested to earn profits. In other words, the excess of assets over liability is capital.
6. Assets
All the resources of a business having economic value are called assets. These resources help the business to earn a profit and have future value. These are important for running a business and are in the possession of businessmen. These are of two types:
a. Fixed assets
The assets which are used by businesses for a long time are called fixed assets or non-current assets. These are continued to be used by the business for a period of more than one year.
For example, land, building, plant, machinery, furniture, vehicle, etc.
b. Current assets
The assets which are used up in one year or easily get converted into cash in one year are called current assets.
For example raw material, finished goods, debtors, cash balance and bank balance, etc.
7. Liabilities
The amount which a business owes to others is called its liabilities. There is a certain amount which business is under obligation to pay. There are two types of liabilities:
a. Long-term liabilities
Those liabilities are usually payable after a period of 1 year. Long-term loans from Financial Institutions, debentures issued by companies, etc.
b. Short-term liabilities
These are those which are payable within one year. For example creditors, bank overdrafts, etc.
8. Drawings
The amount of cash or goods which is withdrawn by the proprietor from the business for its private uses is called drawings. It reduces the capital of the business.
9. Goods
The things which are bought and sold by businesses are called goods. Goods may be raw material work in progress of finished goods. In accounting, when goods are purchased it is written as purchases. When goods are sold it is written as sales. It is written as stock if remains unsold at the end of the year.
10. Purchases
Goods bought for resale are called purchases. This may be in form of raw material or finished goods. Purchase of assets is not called purchases because assets are not purchased for resale.
11. Sales
When purchase goods are sold in order to earn a profit are called sales. When goods are sold for cash it is called cash sales and goods sold on credit are called credit sales.
12. Purchase Return
Goods once purchased by the business, are returned back due to any reason is called purchase return or return outwards.
13. Sales Return
Goods once sold to the customer when are returned back by them due to any reason then such goods are called as sales returns or return inwards.
14. Stock
These are those goods which are left unsold in the business at the end of the year. The goods unsold at the end of the accounting year are called closing stock. The same stock is called opening stock at the beginning of a new accounting year.
15. Revenue
These are the amount received by a business for selling goods or services. This amount is received from day-to-day business activity in the form of rent, interest, commission, discount, dividend, etc.
16. Expenses
The cost that a business incurs for producing goods and services or for using services is called expenses. These include payments made for wages, salaries, freight, advertisement, rent, insurance, etc. In other words, we can say that the cost of earning revenue is an expense.
17. Expenditure
The amount which is paid for increasing the profit-earning capacity of the business is called expenditure. It is of a long period nature.
18. Income
That amount which increases the capital of the business is called income. The excess of revenue over expenses is also called income.
Income = Revenue – Expenses
19. Loss
When expenses incurred are more than revenue then this excess of expenses is called loss. This reduces the capital of the business.
20. Gain
It is a monetary receipt as a result of a business transaction. The excess of revenue over the expenses is called gain.
21. Cost
The total direct or indirect expenses which are incurred for the production of goods and services is called cost. Like the cost of the raw material cost of labor and cost of other services used to make the article is called its total cost.
22. Discount
Concession a rebate allowed by a businessman 2 its customer is called a discount. it may be of two types:
a. Trade discount
When a trader allows a concession to its customers on the list price, it is known as a trade discount. It is not recorded in the books. It is stated in the invoice.
b. Cash discount
When a trader allows a concession to the customer to make payment in cash or by cheque, it is known as a cash discount. It is recorded in the books. When a cash discount is allowed customer is required to pay the less due amount, so it encourages the customer to pay as early as possible.
23. Debtor
The person, firm, or organization who takes goods or services on credit from the business are called debtors of the business. In other words, the person, firm, or organization who owes money or Money’s worth to the business is called the debtor.
24. Creditors
The person, firm, or organization from whom goods or services are purchased on credit by the business are called creditors of the business. The business owes money to them. The amount payable to creditors is a liability of the business.
25. Receivables
The total amount which is to be received in business is called receivables.
26. Payables
The total amount which is to be paid by the business is called payables.
27. Entry
Recording of the transaction in account books is called making an entry or the record of a transaction in books is called an entry.
28. Turnover
The total amount of cash and credit sales during a particular period is called turnover.
29. Insolvent
A person is said to be insolvent when he or she is incapable to meet all his or her liabilities. Such a person has more liability than assets.
30. Bad debts
The amount which could not be recovered from debtors due to his insolvency or disability to pay is called bad debts.
31. Vouchers
The written document through which financial transactions are recorded in the books is called a voucher.
32. Account
A list of all transactions relating to a person, property, income expenses is called into account. It is a tabular statement containing all the transactions of the same nature in one place under a common heading in a systematic manner.
33. Debit and credit
Every account has two sides. The left side is called the debit side and the right side is called the credit side. In short, it is Dr. and Cr.
34. Commission
In business activity, remuneration is paid to the agent for his services, which is called commission.
Example:
Question:
That person to whom we sold goods on credit is called __________
a. Debtors
b. Creditors
c. Proprietor
d. none the of above
Answer:
a. Debtors