Basic Terms in Accounting

 

1 Entity

Entity means a reality that has a definite individual existence. Business entity

means a specifically identifiable business enterprise like Super Bazaar, Hire

Jewellers, ITC Limited, etc. An accounting system is always devised for a specific

business entity (also called accounting entity).

2 Transaction

An event involving some value between two or more entities. It can be a purchase

of goods, receipt of money, payment to a creditor, incurring expenses, etc. It

can be a cash transaction or a credit transaction.

3 Assets

Assets are economic resources of an enterprise that can be usefully expressed

in monetary terms. Assets are items of value used by the business in its

operations. For example, Super Bazar owns a fleet of trucks, which is used by

it for delivering foodstuffs; the trucks, thus, provide economic benefit to the

enterprise. This item will be shown on the asset side of the balance sheet of

Super Bazaar. Assets can be broadly classified into two types: current and

Non-current.

4 Liabilities

Liabilities are obligations or debts that an enterprise has to pay at some time in

the future. They represent creditors’ claims on the firm’s assets. Both small and

big businesses find it necessary to borrow money at one time or the other, and

to purchase goods on credit. Super Bazar, for example, purchases goods for

` 10,000 on credit for a month from Fast Food Products on March 25, 2005. If

the balance sheet of Super Bazaar is prepared as at March 31, 2005, Fast Food

Products will be shown as creditors on the liabilities side of the balance sheet. If

Super Bazaar takes a loan for a period of three years from Delhi State Co-operative

Bank, this will also be shown as a liability in the balance sheet of Super Bazaar.

Liabilities are classified as current and non-current.

5 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 for the business entity capital is an

obligation and a claim on the assets of business. It is, therefore, shown as capital

on the liabilities side of the balance sheet.

6 Sales

Sales are total revenues from goods or services sold or provided to customers.

Sales may be cash sales or credit sales.

7 Revenues

These are the amounts of the business earned by selling its products or providing

services to customers, called sales revenue. Other items of revenue common to

many businesses are: commission, interest, dividends, royalities, rent received,

etc. Revenue is also called income.

8 Expenses

Costs incurred by a business in the process of earning revenue are known as

expenses. Generally, expenses are measured by the cost of assets consumed or

services used during an accounting period. The usual items of expenses are:

depreciation, rent, wages, salaries, interest, cost of heater, light and water,

telephone, etc.

9 Expenditure

Spending money or incurring a liability for some benefit, service or property

received is called expenditure. Purchase of goods, purchase of machinery,

purchase of furniture, etc. are examples of expenditure. If the benefit of

expenditure is exhausted within a year, it is treated as an expense (also called

revenue expenditure). On the other hand, the benefit of an expenditure lasts for

more than a year, it is treated as an asset (also called capital expenditure) such

as purchase of machinery, furniture, etc.

10 Profit

The excess of revenues of a period over its related expenses during an accounting

year is profit. Profit increases the investment of the owners.

11 Gain

A profit that arises from events or transactions which are incidental to business

such as sale of fixed assets, winning a court case, appreciation in the value of

an asset.

12 Loss

The excess of expenses of a period over its related revenues its termed as loss. It

decreases in owner’s equity. It also refers to money or money’s worth lost (or

cost incurred) without receiving any benefit in return, e.g., cash or goods lost by

theft or a fire accident, etc. It also includes loss on sale of fixed assets.

13 Discount

Discount is the deduction in the price of the goods sold. It is offered in two ways.

Offering deduction of agreed percentage of list price at the time selling goods is

one way of giving discount. Such discount is called ‘trade discount’. It is generally

offered by manufactures to wholesellers and by wholesellers to retailers. After

selling the goods on credit basis the debtors may be given certain deduction in

amount due in case if they pay the amount within the stipulated period or earlier.

This deduction is given at the time of payment on the amount payable. Hence, it

is called as cash discount. Cash discount acts as an incentive that encourages

prompt payment by the debtors.

14 Voucher

The documentary evidence in support of a transaction is known as voucher. For

example, if we buy goods for cash, we get cash memo, if we buy on credit, we get

an invoice; when we make a payment we get a receipt and so on.

15 Goods

It refers to the products in which the business unit is dealing, i.e. in terms of

which it is buying and selling or producting and selling. The items that are

purchased for use in the business are not called goods. For example, for a

furniture dealer purchase of chairs and tables is termed as goods, while for

other it is furniture and is treated as an asset. Similarly, for a stationery merchant,

stationery is goods, whereas for others it is an item of expense (not purchases)

16 Drawings

Withdrawal of money and/or goods by the owner from the business for personal

use is known as drawings. Drawings reduces the investment of the owners.

17 Purchases

Purchases are total amount of goods procured by a business on credit and on

cash, for use or sale. In a trading concern, purchases are made of merchandise

for resale with or without processing. In a manufacturing concern, raw materials

are purchased, processed further into finished goods and then sold. Purchases

may be cash purchases or credit purchases.

18 Stock

Stock (inventory) is a measure of something on hand-goods, spares and other

items in a business. It is called Stock in hand. In a trading concern, the stock on

hand is the amount of goods which are lying unsold as at the end of an accounting

period is called closing stock (ending inventory). In a manufacturing company,

closing stock comprises raw materials, semi-finished goods and finished goods

on hand on the closing date. Similarly, opening stock (beginning inventory) is

the amount of stock at the beginning of the accounting period.19 Debtors

Debtors are persons and/or other entities who owe to an enterprise an amount

for buying goods and services on credit. The total amount standing against

such persons and/or entities on the closing date, is shown in the balance sheet

as sundry debtors on the asset side.

20 Creditors

Creditors are persons and/or other entities who have to be paid by an enterprise

an amount for providing the enterprise goods and services on credit. The total

amount standing to the favour of such persons and/or entities on the closing

date, is shown in the Balance Sheet as sundry creditors on the liabilities side