CHAPTER- 2

BASIC ACCOUNTING TERMS

Explain the various terms used in accounting.

1. Business Transaction: It is an exchange of money, goods and/or services. It is

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.

2. Account: It is a record of transactions that pertains to a particular head.

3. 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 are an obligation and a claim on the assets of business.

4. Drawings:Withdrawal of money and/or goods by the owner from the business

for personal use is known as drawings. Drawings reduce the investment of the
owners.

5. Liabilities:Liabilities are the claims of amounts against the entity or enterprise.

It is the amount owed by the enterprise to its owner as well as outsiders.

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(i) Internal Liability: It is the liability of the business towards the owner.
 (ii) External Liability: It is the liability of the business towards outsiders.
This external liability is further divided into two:
 Non-Current liability: Liabilities that are payable even after
12 months from the date of Balance Sheet are called Non-
current liabilities or Long Term Liabilities. Eg: Long-Term
loans, Debentures, etc.
 Current Liability:Liabilities that are payable within 12 months
from the date of Balance Sheet are called Current liabilities.
Eg: Creditors, Bills Payable, Short-Term loans etc.

6. Assets: Assets are the economic resources of the entity which will give benefit
in the future. They are the properties owned by an entity or enterprise.
Eg: Land & Buildings, Plant & Machinery, Stock, Cash and Bank Balances,
Trademarks, Goodwill etc.

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 Non-Current Assets: Assets owned by the entity which are not meant
for resale but are held either as investment or to facilitate business
operations. These assets are usually held for a period more than one
year, i.e., 12 months. Eg: Fixed Assets, Non-current investments, etc.
 Fixed Assets: These are the Non-current assets of an enterprise which
are held not for resale but with the purpose to increase its earning
capacity. Fixed assets are classified into two:

(i) Tangible Assets: Assets that have physical existence, i.e., the
assets that can be touched and seen are called Tangible Assets.
 Eg: Land & Buildings, Plant & Machinery, Computer, Furniture,
etc.
(ii) Intangible assets: Assets that do not have physical existence,
i.e., the assets that cannot be touched and seen are called
Intangible Assets.Eg: Patents, Goodwill, Computer software,
Trademarks, etc.
 Current Assets:Assets owned by the entity which are meant for resale or
conversion into cash. These assets are usually held for a period not more
than one year.Eg: Cash, Stock, Bank Balance, Debtors, Trade receivables,
etc.
 Fictitious Assets: Assets that come into existence by an accounting entry
are called as fictitious assets. They are neither tangible nor intangible. They
are the losses not written off in the year incurred but in more than one
accounting period. Eg: Deferred Revenue Expenditure such as
Advertisement Expenditure.

7. Receipts: Amount being received from the transaction of the business.

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 Revenue Receipt: Amount being received from the sale of goods/services.

 Capital Receipt: Amount being received from sources that are not of
revenue nature. Eg: Sale of Assets.

8. Expenditure:Spending money or incurring a liability for acquiring an asset or a

property is called expenditure.
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 Capital Expenditure:The benefit of expenditure lasts for more than

a year; it is called as capital expenditure. It is treated as an asset. Eg:
Purchase of Plant & Machinery.
 Revenue Expenditure: The benefit of expenditure is exhausted
within a year; it is called as Revenue Expenditure. It is treated as an
expense. Eg: Purchase of goods.

9. Expenses: Amount spent or incurred in order to earn revenue is said to be an

expense. Any expense incurred for the accounting is considered as a normal
expense.

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 Prepaid Expense: It is a type of expense which is paid during the current

accounting period, which belongs to future period. Eg: Prepaid Insurance,
Prepaid Rent, etc.
 Outstanding Expense: It is a type of expense which has not yet been paid,
but incurred during the current accounting period. Eg: Outstanding
Salaries, Outstanding Rent, etc.

10. Revenue: Revenue is the gross inflow of cash or other receivables that arises
out of routine activities of the business entity. Other items of
 revenuecommon to many businesses are: commission, interest, dividends,
royalties, rent received, etc.

11. Income: It is the excess of revenue over expenses.

Income= Revenue - Expenses

12. Profit: It is the profit earned from the transactions that are related to
business, and are of routine nature. It is further divided into two.

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 Gross Profit: It is the Excess of revenue over the direct expenses.

 Net Profit: It is the excess of total revenue and other income over total
expenses.

13. Gain: It is the profit earned from the transactions of business that are
incidental, i.e., non-recurring or non-routine in nature. Eg: Gain on Sale of
Fixed Assets.

14. Loss: It is the excess of total expenses over the total of revenue and other
income. Eg: Loss on sale of Fixed Assets, Cash or Goods lost in theft, etc.

15. Purchases:Purchases are total amount of goods procured by a business for

sale. Purchases may either be cash purchases or credit purchases.

16. Purchases Return: Return of the goods purchased from the supplier due to
various reasons.

17. Sales:Sales are total revenues from goods or services sold or provided to
customers. Sales may either be cash sales or credit sales.

18. Sales Return:Return of the goods sold to the customer due to various reasons.
19. Revenue from Operations: Amount received or the amount receivable on the
sale of goods/ services.

20. 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 producing and selling. The items that
are purchased for use in the business are not called goods .

21. Stock: Goods remaining unsold or unused in manufacturing of product on a

particular date is said to be Stock.

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 Opening Stock: It is the Stock-in-hand in the beginning of an

Accounting Year.
 Closing Stock: It is the Stock-in-hand at the end of the Accounting Year.

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 Stock or Inventory of Goods: It is the stock of goods which is

unsold/unused and ready for the sale/use.
 Stock or Inventory of Raw materials: It is the stock of raw materials
which is used for production, which remains unused.
 Work-in-progress: It is a stock that is in the process of being finished,
i.e., partly-finished goods.
22. Trade Receivables: Amount receivable against the sale of goods and/or
services.

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 Debtors: A Person or an Entity from whom the amount is receivable

against the sale of goods and/or services.
 Bills Receivable: Acceptance, i.e., the bill of exchange received from a
debtor.

23. Trade Payables:Amount payable against the purchase of goods and/or

services.

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 Creditors: A Person or an Entity to whom the amount is payable against

the purchase of goods and/or services.
 Bills Payable: Acceptance, i.e., the bill of exchangegiven to a Creditor.

24. Cost: Expense made on purchasing or manufacturing goods.

25. Voucher: It is an evidence of transaction having taken place.

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  Source Voucher: It is an evidence of the Business Transaction. Eg: Cash
Memo, Invoice or Bill, Debit Note, Credit Note, etc.
 Accounting Voucher:It is prepared from the Source Vouchers.

26. Discount:It is a reduction in price of goods sold or in amount. The discount

given to customers is said to be the Discount Allowed and the discount being
received from the suppliers is called as the Discount Received.

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 Trade Discount: It is the reduction allowed by the supplier in the value

of goods sold, at the time of sales, usually.
 Cash Discount:It is the reduction allowed by the supplier in the amount
payable, at the time of payment, usually to encourage prompt and
timely payment.

27. Rebate: It is a reduction allowed in the sale value due to poor quality, excess
supply, etc.

28. Bad Debts: The debt which seems to be irrecoverable is called as Bad Debts.

29. Balance Sheet: A statement showing the balances of the Assets and Liabilities
of the Business.

30. Book value: It is the value of an asset which is existing in the books of
account.

31. Books of Account: The set of books in which the business transactions are
recorded or posted.
32. Cost of Goods Sold: The cost being attributed towards the good sold or
services rendered.

33. Credit: It is the right side of the ‘T’ shaped account.

34. Debit:It is the left side of the ‘T’ shaped account.

35. Depreciation: Reduction or decrease in the value of an asset due to use or

obsolescence.

36. Entity:Entity means a reality that has a definite individual existence.Business

entity means a specifically identifiable business enterprise or economic unit
which performs economic activities. An accounting system is always devised
for a specific business entity (also called accounting entity).

37. Entry: Recording of a business transaction in the books of account.

38. Insolvent: A person or entity unable to pay off their debts.

39. Solvent:A person or entity capable to pay off their debts.

40. Proprietor: A person who owns the business. The one who contributed capital
to start the business.

41. Financial Statements or Final Accounts: Statements that is prepared at the

end of the accounting period. They are Trading and Profit and Loss Account
(Statement of Profit and Loss) and the Balance Sheet.