BASIC ACCOUNTING TERMS

Chapter-2

An entity means an economic unit which performs economic activities. A business entity means an
1. Entity
enterprise established in accordance with law to engage in business activities. Example for BMW, Nike,
Dominos, ZARA, etc.

2. Business Transaction ‘Business Transaction’ means a financial transaction event entered into by two parties. It is a
financial event expressed in terms of money which brings change in the financial position of
an enterprise.

It is a record of transactions under a particular head of account. It not only shows the amounts of
3. Account
transactions but also shows their effect and direction.
 Capital is the amount invested in an enterprise by the proprietor. It may be in the form of money or
4. Capital
assets having a monetary value. It is also known as Owner’s Equity or Net Worth.

It is the amount withdrawn or goods taken by the proprietor or partner for personal use. Goods so taken
5. Drawings
by the proprietor or partner are valued at their purchase cost.
6. Liabilities Liabilities mean amount owed (payable) by the business. Liability towards the owners of the business is
termed as internal liability. On the other hand, liability towards the outsiders is termed as external
liability.

Liability

Non Current Liability

Current Liability
Non-current liability is that liability which is
Current Liability is that liability which is
payable after a period of more than 12
payable within 12 months from the end of the
months from the end of the accounting
accounting period.
period.

Long- term Long-term Bills

Borrowing Creditors Payable
provision
Long-term
Short-term
Loan
Loan
7.Assets Assets are the properties owned by an entity or enterprise. They are the economic resource of the
business. In other words, anything which will enable the firm to get economic benefit in the future, is an
asset. Examples of assets are land, building, machinery, furniture, stock, debtor, cash and bank balance
etc.

Assets

(i) Non-current assets (ii) Current assets (iii) Fictitious assets

(a) Tangible Assets (b) Intangible Assets

Non-current assets are those assets which are held by an entity or enterprise not with the
(i) Non-current assets purpose to resale but are held either as investment or to facilitate business operations. In
other words, those assets are held by the business from a long-term point of view. Example for
Land, Building, Long-term Investments etc.

(a) Tangible Assets Tangible Assets are those assets which have physical existence, they can be seen and touched.
Example-Land, Building, Furniture, Computer etc.

Intangible Assets are those assets which do not have physical existence, they cannot be seen
(b) Intangible Assets
and touched. Example- Goodwill, Trademarks, Computer Software, etc.
 Current assets are those assets which are held by and entity or enterprise with the purpose of
(ii) Current Assets
converting them into cash within a short period(one year). For example goods, debtors, bills
receivable, etc.

Fictitious Assets are those assets which are neither tangible assets nor intangible assets. They are
(iii) Fictitious Assets
losses not written off in the year in which they are incurred but in more than one accounting
period. An example of fictitious asset is Deferred Revenue Expenditure such as Advertisement
Expenditure.

8. Receipts Any amount received by the entity is called receipt.

Receipts

(i) Revenue Receipt (ii) Capital Receipt

(i) Revenue Receipt It is the amount received in the normal course of business or from use of business resources.
For Example amount received against sale of goods or rendering the services are revenue receipts.

Capital receipts are the receipts which are not revenue receipts.
(ii) Capital Receipt For Example, Capital contribution by owners, receipts from sale of fixed assets such as machinery,
building, furniture, investments, loan etc.
9.Expenditure Expenditure is the amount spent or liability incurred for purchasing assets and goods or taking
services.
Expenditure

(i) Capital Expenditure (ii) Revenue Expenditure (iii)Deferred Revenue Expenditure

It is an expenditure incurred to purchase fixed assets or improving the existing fixed assets
(i) Capital Expenditure which will increase the earning capacity of the business. It may be incurred to purchase
tangible fixed assets or intangible assets.
For Example, Purchases of furniture, computer etc.

(ii) Revenue Expenditure Revenue Expenditure is the expenditure incurred, the benefit of which is consumed within
the accounting period. It has direct relationship with revenue or with the accounting period.
For Example- salary paid, rent paid electricity and telephone expenses.

(iii)Deferred Revenue Deferred Revenue Expenditure is a revenue expenditure in nature but is written off (charged)
Expenditure to Profit & Loss Account in more than one accounting period because it is estimated that
benefit of such expenditure will be available in more than one financial year.
For Example, large advertising expenditure that will give benefit for more than one
accounting period is a Deferred Revenue Expenditure.
 Expenses is the cost incurred for earning revenue. It is a value which has expired during the
10. Expense accounting period. It may be
(i) Cash payment such as salaries, wages, rent, etc.
(ii) Writing off a part of fixed assets (Depreciation).
(iii) Cost of goods sold.
Expenses

(i) Prepaid Expenses (ii) Outstanding Expenses

It is an expense that has been paid in advance and the benefit of which will be available in the
(i) Prepaid Expenses
following year or years.

(ii) Outstanding Expenses It is an expense that has been incurred during the accounting year but not paid.

Revenue is gross inflow of cash, from the sale of goods, from rendering of services etc. Thus, revenue is
11. Revenue
the amount received or receivable by the enterprise from its operating activities. Examples of revenue
are receipts from sale of goods, rent, commission, interest, etc.

Income is the profit earned during an accounting period. In other words, Income is the excess of revenue
12. Income
over expenses.

Income=Revenue + Other Income - Expense

 Profit means income earned by the business from its Operating Activities, the activities carried out by the
13. Profit
enterprise to earn profit, sale of goods and rendering or services.

Profit = Revenue from Sale of Goods - Cost of Goods sold

Profit

(i) Gross Profit (ii) Net Profit

(i) Gross Profit Gross Profit is the deference between revenue from sales and services rendered and its direct cost.

(ii) Net Profit Net Profit is the profit after deducting total expenses from revenue and other Income.

14. Gain Gain is increase in owner’s equity resulting from transaction other than the business transactions from
irregular or non-recurring nature. It is a profit that arises from transactions which are not the Operating
Activities of the business.
15. Loss Loss is excess of expenses of a period over its revenues and other Income. It decreases the owner’s equity.

16. Purchases ‘Purchases’ means purchase of goods for resale or raw materials for manufacturing of goods.

Goods purchased may be returned to the seller for any reason, say, they are defective. Goods
17. Purchases Return
so returned are known as Purchases Return or Returns Outward.
18. Sales ‘Sales’ means sale of goods. The term ‘Sales’ includes both cash and credit sales.

19. Sales Return Goods sold when returned by the purchaser are termed as Sales Return or Returns Inward.

Revenue from Operations means revenue earned by an enterprise from its operating activities.
20. Revenue
Examples are: Net Sale of Goods, sale of services, (for non-financial enterprises) and interest
from Operations
earned, etc.
21. Goods Goods are the physical items of trade that are purchased or manufactured to be sold.

Stock(Inventory) is a current asset held by an enterprise for the purpose of sale in the ordinary
22. Stock/Inventory course of business or for the purpose of using it in the production of goods meant for sale. Stock
(Inventory) may be: (i) Opening Stock (Inventory) or (ii) Closing Stock (Inventory).

STOCK

23. Trade Receivables It is the amount receivable against sale of goods or services rendered or both in the ordinary
course of business. Trade Receivables is a sum total of debtors and bills receivable.

Debtor Debtor is a person or an entity who owes amount to the enterprise against credit sales of goods or services
rendered or both. Amount receivable for reasons other sale of goods or rendering of services is not included
in debtors.
 It is the amount payable for purchase of goods or services taken in the ordinary course of
24. Trade Payables
business.

Creditor is a person or an enterprise to whom an enterprise owes amount against credit purchases of goods
Creditor or services taken or both. Amount payable for reasons other than purchase of goods or service so not
included in creditors.

Bill Payable means a Bill of Exchange accepted by the person or enterprise, the amount of which will be
Bill Payable
payable on the specified date.

25. Cost It is the amount of expenditure incurred on or attributable to a specified article, product or activity.

An evidence or transaction having taken place. Voucher is of two types, Source Voucher and Accounting
26. Voucher Voucher.
Source Voucher – It is an evidence of a business transaction. For example Cash memo, Invoice or Bill,
Debit/Credit Notes, etc.
Accounting Vouchers – It is prepared from the Source Vouchers showing the account heads debited and
credited. For example Invoice, Pay-in slip, cheque etc.

Source Voucher Accounting Voucher

27. Discount It is the reduction in the price of goods or from the amount to be paid to a customer by the enterprise.

Discount

(i) Trade Discount (ii) Cash Discount (iii) Rebate

(i) Trade Discount Trade Discount is the reduction in prices by the seller to the purchaser of goods when they buy
goods of certain quantity or value. Sales are recorded at net value, i.e., Sales-Trade Discount.
Similarly, purchases are recorded by the purchaser at net value, Purchases-Trade Discount.

(ii) Cash Discount Cash Discount is the discount allowed for timely payment of due amount. It is an expense for the
party allowing the discount and income for the party receiving cash discount. It is recorded in the
books of account of both purchaser and seller.
Rebate is the discount allowed by the seller of goods to the purchaser. It is allowed after the sale
(iii) Rebate
has been made. For example, discount allowed for poor quality of goods. It is recorded in the
books or account of both seller and purchaser.
 28. Bad Debts Bad Debts is the amount owed to the business that is written off because of it becoming
irrecoverable. It is a loss for the business.

29. Balance Sheet It is a statement of the financial position of an individual or enterprise at a given date, which
exhibits its assets, liabilities, capital, reserves and other account balances at their respective
book values.

30. Book Value This is the amount at which an item exists in the books of account.

31. Books of Account The records or books in which financial transactions of an entity are recorded and thereafter
posted. They include Journal and Ledger.
 32. Credit Traditionally, right side of an account is the credit side.

Credit Side

33. Debit Traditionally, left side of an account is debit side.

Debit Side
34. Depreciation Depreciation is fall in the book value of an asset because of usage or with efflux of time or
obsolescence or accident.

35. Entry A transaction and event when recorded in the books of accounts known as an Entry.

36. Insolvent Insolent is a person or enterprise which is not in a position to pay its debts.

37. Solvent Solvent is a person or enterprise which is in a position to pay its debts.
 The person who invests amount in business and bears all the risks associated with the business is called
38. Proprietor
proprietor.

39. Financial Statements They are Trading Account, Profit & Loss Account and Balance Sheet prepared at the end of
or Final Accounts accounting process.