BASIC ACCOUNTING TERMS

LANGUAGE OF ACCOUNTANCY
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1. BUSINESS TRANSACTION
• Means a financial transaction entered into by two parties and is
recorded in the books of accounts.
• It is an agreement between two parties involving the transfer or
exchange of goods or services.
• Eg: Sale of goods, Purchase of goods, Payment received from debtors
etc.
• TRANSACTION MAY BE:
• A. CASH B. CREDIT
2. ACCOUNT
• Is a summarized record of transactions relating to a particular head at
one place. The amount, effect and the direction of the transaction is
recorded.

• 3. CAPITAL: is the amount invested by the owner/ proprietor / partner

in the business.
• It may be in the form of money or assets having a monetary value.
• It is a liability for the business towards the proprietor.
• CAPITAL= ASSETS – LIABILITIES.
• 4. DRAWINGS: Is the amount withdrawn or goods taken by the proprietor
or partner for his personal use.
Drawings reduces the investment or capital of the owners.
5. LIABILITY: means the amount payable by the business to the third parties
or to the owners of the business.
Eg. Loan taken from bank, creditors etc.
LIABILITIES ARE FURTHER DIVIDED AS :
A. Non – Current Liability: is one which is payable after a period of more
than a year.
B. Current Liability: is which is payable within 12 months from the end of
the accounting period.
• 6. ASSETS: is a property or legal rights owned by a business to which money value
can be attached.
Anything which will enable the firm to get cash or an economic benefit in the
future is an ASSET.
They are further classified as:
A. Non-Current Assets: are held by the business for a long period of time.
i. Tangible Assets: are those which have a physical existence, they can be seen
and touched. Eg: Building, Furniture, Land
ii. Intangible Assets: are those assets which do not have a physical existence.
Eg: Goodwill, Patents etc.
B. Current Assets: are held by the business with the purpose of converting them
into cash within a short period of time usually a year.
• 7. GOODS: are the physical items of trade.
These are the things manufactured or purchased with a purpose of
selling.
EG:
8. RECEIPTS: Receipt is the amount received or receivable for selling
assets, goods or services.
REVENUE: Receipts are received in the normal course of business.
CAPITAL Receipts is the amount received or receivable against
transactions which are not revenue in nature.
Eg: amount received on sale of assets etc.
9. EXPENDITURE: is the amount spent or liability incurred for acquiring
assets, goods or services. It is further divided as:
• A. Capital Expenditure: is incurred to acquire assets or improving the
existing assets which will increase the earning capacity of the business.
Eg. Purchase of computer, machinery etc.

B. Revenue Expenditure: is the expenditure incurred, the benefit of which

will be within the accounting period. Which has to be incurred again and
again.
Eg: Salaries, Rent, Electricity expenses etc.
• 10. INCOME OR PROFIT: Income is the profit earned during a period.
The difference between revenue and expense is INCOME.
Income=Revenue - Expenses.
11. GAIN: arises from transactions which are incidental to business.
It is non-recurring in nature.
EG: Profit on sale of assets.
12. LOSS: is excess of Expense over Revenue.
It may arise from normal business activities
LOSS= EXPENSES- REVENUE
• 13. PURCHASES AND PURCHASE RETURNS
Purchases means goods purchased for resale or producing the finished
goods.
Purchases may be Cash or Credit Purchases.
Purchase Returns: If the goods purchased are returned back to the
seller for any reason, they are known as Purchase Returns.
14. SALES AND SALES RETURNS
Sales means the selling of goods in which the firm deals.
When buyers return the goods for any reason it is known as Sales
Returns.
• 15. DEBTOR: is a person who owes money to the business.
He comes in the picture only when there is CREDIT sale.
The amount that is due is known as DEBT.
16. CREDITOR: is a person to whom the business owes money.
He comes in the picture only when there is CREDIT Purchase.

17. VOUCHER: is an evidence of a business transaction.

EG: Cash Memo, Bills etc.
.
18. DISCOUNT: When customers are allowed a reduction in the prices
of goods by the business.
Discount may be :
a. Trade Discount : is the rebate allowed by the seller on the basis of
sales, either quantity or value. This discount is not shown in the
books of accounts.

b. Cash Discount: is the rebate allowed for timely payment of due

amount.
It is an expense for the giver and income for the receiver.
• 19. BAD DEBTS: are the debts which are bad.
In simple words, those Debtors who do not pay the money to the
business are known as Bad Debts.
It is a loss to the business.
20. SOLVENT: is a person whose assets are more than his liabilities and
is in a position to pay his debts.
21. INSOLVENT: is a person whose -------------------------------------------------
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