1

Definition of Accounting
Definition of Accounting:

The most widely used definition is that it is ―the process of identifying, measuring,
and communicating the economic information necessary to make judgments and
decisions by the users of the information‖.

Users of Accounting Information:

The possible users of accounting information are:

a) Owners of the business

b) A prospective buyers of the business

c) The bank (if the owner wants to borrow money for use in the business)

d) Tax authorities

e) A prospective partner

f) Investors (The people who wish to invest their money in the business)

Definition of Book-keeping:

The part of accounting that is concerned with recording data is known as Book-
keeping.

Terms used in Accounting

(1) Assets: Assets are resources owned by a business. Assets are classified into:

(a) Non-current assets: Non-current Assets are assets kept in the business for a few
years at least. Examples: land, premises, furniture, fixtures, buildings fittings, plants,
machineries, motor cars, motor vehicles, motor lorries, goodwill, mines, quarries, oil
wells etc…

(b) Current assets: The assets which change its form from day to day are known as
current assets. These are also known as circulating assets.

Examples: cash in hand, cash at bank, inventory of goods, Trade Receivables,

amounts prepaid, income accrued etc.

(2) Liabilities: The amounts of money a business must pay to its outsiders are known
as liabilities. The term liability is divided into:

Prepare by, Fahad sir, Senior Teacher, SEMS, Mob-01819497609

 2

(a) Current liabilities: Those liabilities which are repayable within the near future are
known as current liabilities. Examples: Trade Payables, bank overdrafts, expenses owing,
incomes received in advance etc.

(b) Non-current liabilities: The liabilities which are repayable after a long period are known
as long term liabilities. Examples: loan from bank, loan from other institutions and loan from
any person.

(3) Account: Part of double entry records, containing details of transactions for a specific
item. An account is drawn in ‗T‘ form with two equal halves called debit side and credit
side. The left hand side is called debit side and right hand side is called credit side.

(4) Capital: The amount of resources supplied by the owner is called as Capital. In
accounting, capital is the excess of assets over liabilities. It is also known as net worth or
owner’s equity.

(5) Working Capital: The excess of current assets over current liabilities [current assets
minus current liabilities] is known as working capital.

(6) Trade Receivable: The person who owes money to a business for goods or services
supplied to him.

(7) Trade Payable: The person to whom money is owed for goods or services supplied by
him.

(8) Drawings: Cash or goods withdrawn by the owner from the business for his personal use
are known as drawings.

(9) Journal: The book where the first entry of every transaction is made. It is also known as
book of original entry, day book or subsidiary book.

(10) Ledger: Ledger means a group of accounts.

(11) Purchases: means ―the purchase of goods for the purpose of selling‖

(12) Sales: means ―goods sold by the business, which were previously bought for resale‖.

(13) Returns Inwards/ Sales returns: Goods returned to the business by its customers

(14) Return Outwards/Purchase returns: Goods returned by the business to its suppliers.

(15) Budget: It is a plan expressed in terms of money containing the details of how much we
will spend and how much we will save from our business.

(16) Plan: It is an estimate for the future work which is usually not expressed in term of
money.

Prepare by, Fahad sir, Senior Teacher, SEMS, Mob-01819497609

 3

Assignment Questions
Q. 1 The plan of how much we will spend and how much we will save from our
business is said to be:
(a)( a budget ) (b) a plan (c) an account (d) a ledger.

Q. 2 The part of accounting that is concerned with recording data is often called:

(a) principles of accounts (b) definition of accounting

(c) balance sheet (d) (book keeping)

Q. 3 Resources in the business is said to be resources supplied by the:

(a) (owner) (b) Trade Receivable (c) Trade Payable (d) money lender.

Q. 4 Owner‘s equity is otherwise called

(a) net profit (b) total assets (c) working capital (d) net worth.

Q. 5 Which of the following is not a Non-current Asset?

(a) buildings (b) premises (c) cash balance (d) plants

Q. 6 Which of the following is a Non-current Asset?

(a) Plants (b) Trade Receivables (c) (cash balance) (d) bank balance.

Q. 7 Which of the following is not a current asset?

(a) Trade Receivables (b) Trade Payables (c) cash in hand (d) (cash at bank)

Q. 8 A financial plan expressed in money is called:

(a) a plan (b) an account (c) a ledger (d) (a budget ) (e) none of these

Q. 9 A person to whom money is owed for goods or services is called the

(a) owner (b) borrower (c) Trade Receivable (d) (Trade Payable)

Q. 10 The total amount of money owed for goods or assets supplied to a business is
called
(a) assets (b)( liabilities) (c) equity (d) capital.

Q. 11 A person who owes money for goods or services supplied to him is called the

(a) owner (b) borrower (c) Trade Payable (d) Trade Receivable.

Q. 12 Anything purchased for the purpose of resale is said to be

Prepare by, Fahad sir, Senior Teacher, SEMS, Mob-01819497609

 4

(a) sales (b) sales return (c) ( purchase) (d) purchase

return

Q. 13 Goods returned by our customers are said to be

(a) (sales return ) (b) purchase return
(c) sales (d) purchases

Q. 14 Goods returned to our suppliers are said to be:

(a) purchases (b) sales
(c) (purchases return ) (d) sales return

Q. 15 Inventory in trade is an example of

(a) an asset (b) a Non-current Asset (c) a current asset (d) a floating asset

Q. 16 The person who buys goods from a business on credit is called the

(a) owner (b) Trade Payable (c) (Trade Receivable) (d) supplier

Q. 17 The person who contributes money to the business is known as its

(a) Trade Receivable (b) (Trade Payable ) (c) owner (d) supplier

Fill in the following with the correct terms

1) Bank overdraft is an example of a ———— —————.

2) Capital is also known as —net worth—————

3) The person who owes money to a business is known as ——trade receivable——

——–.

4) The person to whom money is owed for goods or services is known as——trade
payable——–

5) The total of resources supplied to a business by its owner is known as ————

6) The assets kept in the business for a long period is known as ———non-current
assets———–

7) Cash at bank is an example of ——————asset———

8) Premises is an example of ————– asset

9) The part of accounting that is concerned with recording data is known as —

book keeping—

10) In accounting, —purchase——————- means goods sold by the business

which were previously brought for resale.

Prepare by, Fahad sir, Senior Teacher, SEMS, Mob-01819497609

 5

11) In accounting, purchase means the purchase of goods for the purpose of —
resale——

12) Drawings mean ——cash———- or ——goods——— taken by the owner for

his —personal use——

—————

13) Liabilities can be current liabilities and ———non-current liabilities—– ——

————— ———

Prepare by, Fahad sir, Senior Teacher, SEMS, Mob-01819497609