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Basic Accounting Terms

Basic Accounting Terms

Objective After going through this lesson, you shall be able to understand the 'Basic Accounting Terms' that we will more commonly use in our subsequent lessons. 1. Transaction: Transactions are all those instances, where there exists either outflow or inflow of cash. For example: purchase of furniture or goods, sales of goods, etc. 2. Event: Happenings which occur due to transactions, causing a change in the financial position of the business. 3. Entity: An entity means a unit which has an independent or real existence. 4. Proprietor: Proprietor is a person who makes investment in the business. 5. Capital: Capital is the amount invested by the proprietor in the business. Capital has credit balance. Increase in capital is credited and decrease in capital is debited. 6. Drawings: Goods or cash that is withdrawn by the proprietor from business for his/her personal use is termed as Drawings. 7. Debtors: Persons or organisations that are liable to pay money to a firm are called Debtors. 8. Creditors: Persons or organisations to whom the firm is liable to pay money are called Creditors. 9. Assets: Assets include all properties or legal rights owned by a firm for its operations, such as cash in hand, plant and machinery, bank, land, building, etc. All assets have debit balance. Increase in assets is debited and decrease in assets is credited. The assets can be classified as:      • Tangible Assets: Assets that can be seen or touched, i.e. those assets that have physical existence, are termed as Tangible Assets; for example, Plant and Machinery, Land and Building etc.      • Intangible Assets:  Assets that cannot be seen or touched, i.e. those assets that do not have physical existence, are termed as Intangible Assets; for example, Goodwill, Patents, Trade mark, etc.      • Current Assets: Assets that can be easily converted into cash or cash equivalents are termed as current assets.      • Fictitious Assets: These are the heavy revenue expenditures, the benefit of whose can be derived in more than one year. It is also known as deferred revenue expenditure.      • Liquid Assets: Those assets which can be easily and quickly convertible into cash are termed as Quick Assets. These are also known as Liquid Assets. 10. Liability:  Liability is an obligation of the business such as Creditors, Bills Payable etc. to whom the payment is to be made.     • Internal Liabilities: Internal liabilities represent the amount of funds that a business owes to its owners. For example, capital contributed by the owners is regarded as an internal liability.     • External Liabilities: External liabilities represent the amount of funds that a business owes to the outsiders. For example, creditors, suppliers, bank etc.     • Contingent Liabilities: Liabilities that may or may not become payable, depending on the outcome of a future event. 11. Goods: Those items which are either produced or purchased for the purpose of sale in the business are termed as Goods. 12. Cost of Goods Sold: Cost of goods sold (COGS) is the cost of merchandise that is sold to the customers.  13. Stock: Goods which are held by the firm for the purpose of sale in the normal course of business is termed as stock. 14. Stock of Raw Material: It means the stock of goods which is used for manufacturing of goods and converting it into finished goods. 15. Stock of Finished Goods: It comprises those goods which are manufactured for the purpose of sale but remained unsold.Purchases: Purchases means the goods which are purchased for resale or for producing the finished goods from it. It includes both cash as well as credit purchases. 16. Stock of Work-in-Progress: Those goods which are in the process of becoming finished goods are termed as Work in progress. 17. Sales: Sale of goods either in cash or credit is termed as Sales. 18. Purchases Return/Returns Outward: Goods which are purchased and are returned to the suppliers are known as Purchases Return. It is also known as Return Outward. 19. Sales Return/Returns Inward: Goods which are sold to the customers and are returned by them are known as Sales Return. It is also known as Return Inwards. 20. Bills Payable: Bills Payable is a negotiable instrument accepted by the business and returned to the creditor for paying the specified amount on the maturity date. 21. Bills Receivable: Bills Receivable is a negotiable instrument that is received by the business and accepted by a debtor, to pay the specified amount on the maturity date. 22. Profit: Profit is the amount that is earned over its cost during an Accounting Period. It is also known as Income. 23. Loss: Excess of expenses over revenues is termed as Loss. 24. Gain: Gains are incidental to the business. They arise from irregular activities or non-recurring transactions. 25. Income: Income means profit earned during an accounting period from any source. Income also means excess of revenue over its cost during an accounting period. Income has credit balance. It is also known as profit. 26. Prepaid Expenses: Expenses which are paid in advance by the business for the current accounting period are known as Prepaid Expenses. 27. Outstanding Expenses: Expenses related to the current period that are still to be paid are termed as Outstanding Expenses. 28. Accrued Income: Income that is earned during the accounting period but not received in the same year is termed as Accrued Income. 29. Income Received in Advance: Income which is not related to the current year but received during the year is known as Income received in advance. It is also known as Unearned income. 30. Account: An account is a record of transaction in the debit and credit column related to a particular head. 31. Accounting Period: The time interval for which accounts are maintained by an organization is known as accounting period or accounting year which varies from company to company. 32. Accounting Year: Accounting year refers to the annual time period when the books of accounts are closed. An accounting year consists of twelve months. It may be same or different from calendar year. 33. Amortisation: It refers to the writing off the value of intangible assets such as copyrights, trademarks etc. over its useful life. 34. Depreciation: Depreciation is reduction in the value of fixed assets associated with their continuous use in the business or due to obsolscence, accident or efflux of time. 35. Expense:  It is made to run business smoothly and to carry day to day business activities. It is the cost that is incurred on the activities of business. The expenses can be classified into:    • Capital Expenditure: Expenditures which are incurred on the purchase of fixed asset and which are non recurring in nature are termed as Capital Expenditure.    • Revenue Expenditure: Expenses related to the day to day activities and which are recurring in nature are termed as Revenue Expenditure.    • Deferred Revenue Expenditure: These are the heavy revenue expenditures, the benefit of whose can be derived in more than one year. It is also known as fictitious assets. 36. Receipts: All inflows from various sources during an accouting year. The receipts can be classified into:    • Revenue Receipts: Those receipts which are received during the normal course of business i.e. receipt from sale of goods etc.    • Capital Receipts: These receipts are earned from those transactions which are not revenue in nature like proceeds from the sale of machinery etc. 37. Books of Accounts: Books of accounts are the accounting records in which transactions of a business are recorded. 38. Debit: Debit comes from the Italian word debito, which is derived from the Latin word debeo, which means, ‘owed to proprietor’. 39. Credit: Credit comes from the Italian word credito, which is derived from the Latin word credo, which means belief, i.e., ‘owed by proprietor’. 40. Balance Sheet: A statement of financial position of the business at a given date.

Abnormal Income: It refers to all those incomes which are not earned from the operating activities of the business and it is not frequently earned by a business. Abnormal Losses: It includes all the losses that are accidental to a business enterprise and are not frequently incurred by the business. Acceptance of Bill of Exchange: When the bill drawn by the creditor is accepted by the debtor for the amo…

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