Basic Accounting Terms

Learning objectives
1) Meaning, definition and types of Assets
2) Meaning of Liabilities
3) Meaning of Capital
4) Meaning of Expenses and Income
5) Meaning of Expenditure and Revenue
6) Meaning of Debtors and Creditors
7) Meaning of Goods
8) Meaning of Cost
9) Meaning of Gain
10) Meaning of Stock and its Types
11) Meaning of Purchase and Sales
12) Meaning of Profit and Loss
13) Meaning of Voucher
14) Meaning of Discount and its Types
15) Business transactions and its main features
16) Meaning of Drawings
 Meaning, definition and types of Assets
Assets are future economic benefi ts, the rights of which are owned or controlled by an
organization or individual. -Finney & Miller
An assets must have the following three main characteristics:-
 the resources must be valuable
The resources must be owned by the business
The resources must be acquired at a measurable money cost.
Assets may be classified into four types.
Current assets
Classification of Assets • Held for resale or which the management would want to
Fixed Assets convert into cash within one year.
• Continue use in business • Known as short lived assets, active assets, floating
• Producing goods and services assets, circulating assets.
• Not held for resale purpose. • E.g.. Cash , bank balance, Bills Receivables, Debtors.
• Eg. Land and building, motor vehicles, furniture. • Note: out of the above assets stock and investments are
shown in the b/s at Cost or Net Realizable Value
Which ever is less.

Tangible and intangible

assets
• TAN-Assets can be seen and touched.
• TAN-Have a physical existence. E.G. Land, building, plant,
furniture.
• INTAN- cannot be seen and touched.
• INTAN- does not have any physical existence. E.g.
Goodwill, Patent, Trademark.
Wasting assets
• These are the assets which are consumed through being
worked or used.
• Eg. Oil mine, coal mines
• Or wasting assets are those assets which get exhausted
with the lapse of time. Eg. Patent, trade mark,etc.
 Meaning of liabilities
Meaning:-Liability refers to the amount which the firm owes to outsiders
Definition:- “Liabilities are debts, they are mounts owed to creditors.”
Finney and Miller

Classification of Liabilities
Long term liabilities or Fixed Current liabilities
Liabilities • Which are to be paid in near
• Which are fall due for payment future.
in a relatively long period. • Normally within one
• Normally more than one accounting year.
accounting period.
• E.g. long term loans, • E.g.. Bank overdraft, creditors,
Debentures. short term loan.
 Meaning of capital

Amount invested by the proprietor in a business.

Here amount means Cash, bank balance, any kind of assets.

Meaning of Expenses and Income

Expenses:- it is the cost incurred in producing and selling the goods and services.
Followings are included in Expenses
 Cost of Goods Sold
 Amount paid for rent, commission, salary, advertisement.
 Depreciation.( decline in the value of assets caused by the use of such assets
for business purpose only.

Income :- Income is different from revenue

amount received from sale of goods is called Revenue
and cost of goods sold is called Expenses.
and surplus of revenue over expenditure is calles Income
Income = Revenue – Expenses.
 Meaning of Expediture
Any type of payment for the receipt of a benefi t is termed as expenditure.
OR
Any disbursement of cash / transfer of property/ incurring a liability for the purpose of
Acquiring assets, goods or services is called expenditure.
Expenditure may be of two types

Basis of difference Capital expenditure Revenue expenditure

Benefit exhausted More than one accounting period Within one accounting period

Frequency Non-recurring Recurring

Earning capacity Increase Maintain

Effects on fixed assets Increase in value of fixed assets Not create any assets

Presented Balance sheet assets side Trading or Profit and Loss debit side.

Example Spent money on erection/purchase of building, Salary, repair, depreciation etc.

plant etc
 Meaning of Revenue
It means income of recurring/regular nature.
It consist amount received from sale of goods or providing services.
E.g. Rent, Commission, Dividend, Interest.

Meaning of Debtors
Those persons or fi rms to whom goods have been sold or services rendered on credit basis.
Those who still owe some amount to the business.
Receivables:- Debtors + Bills Receivables

Meaning of Creditors
Those persons or fi rms from whom goods have been Purchased or services produced on credit
basis.
Some money still owing to them.
Payables:- Creditors + Bills Payables
 Meaning of Goods
Goods includes those things which are purchased for resale,
OR
which are used for producing the fi nished goods, which are also meant to be sold.

Meaning of Cost
Amount of resources given up in exchange for some goods or services.
Resources may be money or equivalent to money.

Meaning of Gain
It is monetary benefi ts, profi t or advantage of events which are incidental to the main business.
Example : profi t on sale of fi xed assets, winning lottery, appreciation in the value of fi xed
assets etc.

Meaning of Stock
Stock means value of goods remain unsold at the end of accounting period.
Stock may be of two types
a. Opening stock-: Stock in business on the fi rst day on the beginning of the year. Or closing
stock of last day of the year will automatically become opening stock.
b. Closing stock-: stock held in business on the end date of the business.
Note :- Closing stock and opening stock will always be same.
But opening stock and closing stock will not be same.
 Meaning of Stock
Types of stock for a manufacturing concerns
There may be 3 type of stocks.
1. Stock of Raw Material :- Unused material which is used for product manufactured.
2. Stock of Work in Progress:- Stock of partly fi nished goods.
OR
It means goods in semi-fi nished form.
3. Stock of Finished Goods:- Goods which is completely fi nished and are ready for sale.
Calculation of Closing Stock
Stock is valued :- Cost price (A)= xxxxx
Net Realizable Valued (B)= xxxx
A or B which ever is less = xxxxx

Meaning of Purchase
The term purchase is used only for the purchase of Goods in which the business deal.
Meaning of Purchase Return
When purchase goods return to the supplier then these are known as purchase return.

Meaning of Sales
The term sales is used only for the sales of those goods which are purchased for resale purpose.
 Meaning of Sales Return
When customers return goods sold to them are called sales return.

Meaning of Loss
When total expenses exceeds the total revenues.
OR
If some activity against which fi rm receives no benefi ts called loss.

Meaning of profit
When total revenue exceeds total expenses.
Profi t increases investment of the owner. In simple words profi t increases capital.

Meaning of voucher
Voucher is a document which provides the authorization to pay .
Business transactions are fi rst recorded in the books of accounts.
A separate voucher is prepared for each transaction and it specifi es the account to be debited
or credited.
 Meaning of voucher
Voucher is a document which provides the authorization to pay .
Business transactions are fi rst recorded in the books of accounts.
A separate voucher is prepared for each transaction and it specifi es the account to be debited
or credited.

Meaning of discount
It is a rebate or an allowance given by the seller to the buyer.
Discount may be of two type

Trade discount
• Provided for increasing sales. Cash discount
• Provided by wholesaler to its retailer at • Provided for getting prompt payment.
fixed percentage. • Provided by wholesaler to retailer.
• Provided on list/catalogue price • Provided on received amount.
• Not recorded in books. • Provided in books.
• Deducted from gross value of goods.
Meaning of business transactions
-Business transactions are economic activities of the business that changes its fi nancial
position.
-Every business transaction change in the values of some of the assets, liabilities or capital.
-Business transactions may be of two types Internal and external.
-Internal transaction means transactions held with one business entity.
-External transaction means transactions held between two separate business entity.
 Meaning of Drawings
Amount withdrawn by the owner from the business for his/her personal use.
Amount may in cash, goods or kind.