BASIC

ACCOUNTING TERMS
1. BUSINESS TRANSACTION
• Financial Transaction or Financial Event expressed in terms
of money which brings a change in the financial position
of an enterprise.
• It is an agreement between 2 parties involving transfer or
exchange of goods or services.
TRANSACTION

• Activities of Business involved in transfer of

• Money and Goods
• Between 2 persons or 2 accounts
• Eg: Purchase of Goods, Salary paid, Commision
received, Interest paid, Sale of Goods
• Cash and Credit Transactions
CHARACTERISTICS OF A BUSINESS
TRANSACTION
• Concerned with money or money's worth of goods or services
• Arises out of transfer or exchange of goods or services
• Brings about a change in the financial position
• Has an effect on accounting equation of any business firm
• Dual aspects or 2 sides- Receiving the benefit (Debit) or Giving the benefit
(credit)
• After each transaction total assets of a business must be equal to its total
liabilities and Capital
2. ACCOUNT
• It is a record of transactions(cash and credit)
under a particular head of account or a
particular head (say asset, liability, income,
expenses, etc)
• It not only shows the amounts of transactions
but also shows their effect and direction
 3. CAPITAL
• Also known as Owner's Equity or Net worth
• Amount invested in an enterprise by the proprietor (in case of
proprietorship) or by partners in partnership business.
• It may be in the form of money or assets having a monetary value.
• It is a liability of business towards proprietor or partners
• Business Entity Concept – Transactions recorded in books of account
from the point of view of business.

• Capital = Assets –Liabilities

4. DRAWINGS

• It is the amount withdrawn or goods taken by the proprietor or

partner for personal use.
• Valued at purchase cost. (one cannot make a profit out of a
transaction with oneself
5. LIABILITIES
• Amount owed by the business.
• Internal Liability:
• Liability towards the owners of the business
• External Liability:
• Liability towards the outsiders I.e., other than the
owners (proprietor or partners)
NON-CURRENT LIABILITY

• Liability which is payable after a period of

more than a year from the end of the
accounting period
• Eg: Long term loans, debentures
CURRENT LIABILITY

• Liability which is payable within 12 months

from the end of the accounting period
• Eg: Creditors, Bills payable, Short-term loans
ASSETS
• Properties owned by an entity
• Tangible or Intangible
• Anything which will enable the firm to get
economic benefit in the future
• Eg: Land, building , machinery, cash, trademark
NON – CURRENT ASSETS
• ASSETS held by an entity or enterprise either as investment or to
facilitate business operations and not with the purpose to resell.
• These type of investments lasts for long and cannot be easily
liquidated into cash and can generate economic benefits to the
company for more than a year.
• Eg: Fixed assets, Non-current Investments, Long term loans, Long
term advances - sums received before an obligation is fulfilled.
FIXED ASSETS
• TANGIBLE – seen and touched
• Eg: Land, Building, Machinery, etc
• INTANGIBLE- Cannot be seen and touched
• Eg: Patents, Goodwill, Trademark, etc
CURRENT ASSETS

• ASSETS HELD BY AN ENTITY WITH THE PURPOSE

OF CONVERTING THEM INTO CASH WITHIN A
SHORT PERIOD (ONE YEAR)
• Eg: GOODS/STOCK, DEBTORS, BILLS RECEIVABLE
FICTITIOUS ASSETS
• Fictitious Asset is a fake asset
• Neither tangible nor intangible assets
• Fictitious assets are not the asset in business
and there is no realizable value besides the
cash outflow. It supposes to classify into
expenses, but the company decides not to do
so.
The purpose of Fictitious Asset is to delay
the recognition of the expense and defer it
to the future period.
The company does not acquire this asset. It
is the accounting treatment that results
from the adjustment of expense into the
asset account.
EXAMPLE
• Preliminary expense
• These are the expense which occurs before the business is officially corporate, so the
company record it as an asset and amortize them over time. The company does not
record it into income statements in the first year as it is not relevant to any specific
accounting period.
• The promotional expense of a business
• Some entities require to spend a huge budget on promotion of product, service, or
even the brand itself. After building a good brand, the company can utilize it overtime
and it will not necessary to promote more in the future. With this scenario, the
company will classify it as an asset and reverse it to expense in the future.