BASIC ACCOUNTING TERMS

1) Entity- An entity means an economic unit which performs economic activities

2) Transaction- It is an economic event expressed in terms of money which brings change in the financial
position of an enterprise. A transaction may be a cash transaction or a credit transaction
 When the amount is paid/received immediately on entering into a transaction, it is a cash
transaction
 When the amount is promised to pay later, it is a credit transaction

3) Account- is a record of similar transactions under a particular head

4) Capital- Amount/assets invested in the enterprise by the proprietor is called Capital. It is also known as
Owners’ Equity or Net worth.
 Capital is an internal liability of the firm towards the proprietor
 It is calculated as: Capital = Assets- outside liabilities

5) Drawings- It is the amount withdrawn/ goods taken by the proprietor for personal use. Drawings reduces
the capital of the proprietor

6) Liabilities- These are the amounts owed (payable) by the business.

 Liability towards the proprietor is termed as internal liability
 Liability towards the outsiders is termed as external liability
Liabilities are of two types:
a) Non current liability- Payable after one year from the end of the accounting period. Eg- long
term loan, Debentures
b) Current liability- Payable within 12 months from the date of Balance Sheet. Eg- Creditor, Bills
Payable, short term loan, Bank overdraft, outstanding expenses

7) Assets- Assets are the economic resources of the entity which will give benefit in the future
Assets can be classified into
a) Non current assets/ fixed assets- Assets which are held not for resale but for the purpose of utilising
them in the business or increasing the earning capacity of the business. These can be subdivided into
 Tangible assets- Assets having physical existence. Egs- Land, building, furniture, machinery
 Intangible assets- Not having physical existence. Egs- Patents, goodwill, Trademark, computer
software
b) Current assets- Assets which are held for resale/ conversion into cash within a short period I.e one
year
Egs- Cash, Bank balance, debtors, Bills Receivable, Prepaid expenses, accrued income
C) Fictitious assets- Assets which are neither tangible nor intangible. They are losses not written off in
the year in which they are incurred but in more than one accounting period. Eg- Deferred revenue expenditure
like Advertisement

8) Purchases- Refers to those goods in which the firm is dealing. Goods may be purchased for resale or as
raw materials for manufacturing purposes. Purchases include both cash & credit purchases.

9) Purchase Return- Goods may be returned to the seller for any reason, eg- for being defective. These are
known as purchases return or return outward
10) Sales- Refers to selling of those goods in which the firm is dealing. It includes both cash & credit sales
Amount received or receivable from the sale of goods/services is known as Revenue from Operations

11) Sales return- Goods sold when returned by the purchaser are termed as sales return or Return Inward

12) Stock/inventory- Refers to those goods which are held by an enterprise for the purpose of sale in the
ordinary course of business or for using it in the production of goods meant for sale. Inventory may be
 Opening inventory- Stock in hand in the beginning of the accounting year or at the end of the
previous accounting year.
 Closing inventory- Stock in hand at the end of the current accounting year

13) Debtor- A person or entity to whom goods /services are sold on credit

14) Bills receivable- A bill of exchange accepted by a Debtor, the amount of which will be received on the
specified date

15) Trade Receivable- Sum total of Debtors & Bills Receivable

16) Creditor- A person or entity to whom amount is payable against purchase of goods/ services

17) Bills Payable- Acceptance given to a creditor

18) Trade Payable- Sum total of creditors & bills payables

19) Expenditure- It is the amount spent or liability incurred for purchasing assets or taking services. It can be of
two types:
a) Revenue Expenditure/ Expenses- amount spent for earning revenue
 It involves amount spent for day to day activities. Eg- salary, raw materials, rent paid, electricity
expenses, insurance premium paid, transportation charges etc.
 The benefit of revenue expenditure is exhausted within one year
 It is shown in the Trading & Profit & Loss Account
Expenses can be prepaid(paid in advance) or outstanding (due but not paid)
b) Capital Expenditure- It is the amount spent for purchasing/ improving/ expanding the fixed asset
 It improves the earning capacity of the firm. Eg- Purchase of land/ building/ furniture, installation/
transportation/ registration/ insurance charges at the time of purchase
 It provides benefit for a longer period of time
 It is shown in the Balance sheet
c) Deferred Revenue Expenditure- It is a revenue expenditure in nature but is written off in more than
one accounting period because it’s benefit will be available in more than one financial year
(typically 3-5 years) Eg- Advertisement expenditure

20) Revenue- Revenue is the amount received or receivable by the enterprise from its operating activities.
Eg- Sale of goods ( revenue from operations), rent/ commission/ interest received

21) Income- Income is the profit earned during an accounting period. It is the excess of revenue over expenses
 22) Gain- Gain refers to the profit resulting from transactions other than the day to day transactions or regular
transactions. Eg- gain on sale of land, machinery or investments.

23) Loss- Loss is the excess of total expenses over total of revenue and other income. A loss does not
generate any revenue.

24) Purchases- Refers to those goods in which the firm is dealing. Goods may be purchased for resale or as
raw materials for manufacturing purposes. Purchases include both cash & credit purchases.

25) Purchase Return- Goods may be returned to the seller for any reason, eg- for being defective. These are
known as purchases return or return outward

26) Sales- Refers to selling of those goods in which the firm is dealing. It includes both cash & credit sales
Amount received or receivable from the sale of goods/services is known as Revenue from Operations

27) Sales return- Goods sold when returned by the purchaser are termed as sales return or Return Inward

28) Stock/inventory- Refers to those goods which are held by an enterprise for the purpose of sale in the
ordinary course of business or for using it in the production of goods meant for sale. Inventory may be
 Opening inventory- Stock in hand in the beginning of the accounting year or at the end of the
previous accounting year.
 Closing inventory- Stock in hand at the end of the current accounting year

29) Debtor- A person or entity to whom goods /services are sold on credit

30) Bills receivable- A bill of exchange accepted by a Debtor, the amount of which will be received on the
specified date

31) Trade Receivable- Sum total of Debtors & Bills Receivable

32) Creditor- A person or entity to whom amount is payable against purchase of goods/ services

33) Bills Payable- Acceptance given to a creditor

34) Trade Payable- Sum total of creditors & bills payables

35) Voucher- An evidence of a transaction having taken place

36) Discount- A reduction in price of goods sold or in amount. Discount allowed may be of two types:
a) Trade discount- Discount allowed when goods are purchased in bulk
b) Cash discount- Reduction in amount payable due to timely payment