2. Basic Accounting Terms

                          BUSINESS TRANSACTION (STUDYNATIC)

               ‘Business Transaction’ means a financial transaction or economic event entered into by two parties that initiates the accounting process of recording it in the books of account of an enterprise. It is an agreement between two parties involving transfer or exchange of goods or services. Example of business transactions are sale of goods, purchase of goods. It has dual aspects or two sides- ‘Receiving’ called Debit and ‘Giving’ called Credit of the benefit. 

                                    ACCOUNT(STUDYNATIC)

                It is a record of transactions (cash and credit) under a particular account (say Sales, Purchases, Salaries, Telephone Expenses, Electricity Expenses  etc.) or a particular head (say assets, liability, etc.). It not only shows the amounts of transactions but also shows their effect and direction.

                                          CAPITAL(STUDYNATIC)

               Capital is the amount invested in an enterprise by the proprietor.  It may be in the form of money of assets having a monetary value. It is a liability of the firm towards the proprietor. It is so because under “Business Entity Concept”, business is separate and distinct entity from its owners.

                                     DRAWINGS(STUDYNATIC)

               It is the amount withdrawn or goods taken by the proprietor or partner for personal use. For example if proprietor pays house rent, buy a car or pay children tuition fees or goes to the vacation using business capital then it is recorded as a reduction to the owner’s equity account or drawing.   

                                 LIABILITIES (STUDYNATIC)

              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, i.e. other than the owners is termed as external liability.

Liability classified into: 

1. Non-current liability – Liabilities payable after 12 months from the date of Balance Sheet. That is non current liability. Example of Non-current Liability is long-term loans, debentures, etc.
2. Current Liability – Liabilities payable within 12 months from the date of Balance Sheet. That is current liability. Example of Current Liability is bills payable, short-term loans, etc.

                                                ASSETS(STUDYNATIC)

Assets are the properties (tangible assets and intangible assets) owned by an entity or enterprise. They are the economic resources of the business. Example of assets are land, building, machinery, furniture, stock, debtors, cash and bank balances, trademarks, copyrights, goodwill, etc.

Assets can be classified into:

1. Non-current Assets
2. Current Assets
3. Fictitious Assets

1. Non-current Assets – Non-current Assets are those assets which are held by an entity or enterprise not with the purpose to resell but are held either as investment or to facilitate business operations. Examples of Non-current assets are fixed assets.

         Fixed assets are further classified into:

1. Tangible Assets – Tangible assets are those assets which have physical existence, they can be seen and touched. Example of tangible assets are land, building, machinery, computer, furniture, etc
2. Intangible Assets – Intangible Assets are those assets which do not have physical existence, they cannot be seen and touched. Examples of intangible assets are patents, goodwill, trademarks, computer software, etc.
3. Current Assets – Current Assets are those assets which are held by an entity or enterprise with the purpose of converting them into cash within a short period, one year. For example, goods are purchased with a purpose to resell and earn profit; debtors exist again for receiving cash against it, etc.
4. Fictitious Assets – Fictitious assets have no physical existence or realisable value, but the company shows them as cash expenditure in the books of accounts. They are a part of the assets column in the financial statements, and they are expenses or losses that so not get written off during the accounting period of their occurrence.  An example of fictitious asset is deferred Revenue Expenditure such as Advertisement Expenditure.

                                      RECEIPTS(STUDYNATIC)

                A receipt is a written acknowledgement of the transfer of something valuable from one party to another. These normally given to customers by vendors and service providers, receipts are also given in business-to-business entities as well as stocks market transactions.

Receipts are classified into two types:

1. Revenue Receipts – It is the amount received in the normal course of business say against sale of goods or rendering of service or interest on investment of business resources say in fixed deposit.
2. Capital Receipts – Capital receipts are the receipts which are not of revenue nature. For example, capital contribution by owners, receipts from sale of assets such as machinery, building, furniture, investments, loan, etc.

                                       EXPENDITURE(STUDYNATIC)

         Expenditure refers to payments made or liabilities incurred in exchange for goods or services. The term expenditure usually refers to capital expenditure, which is usually a one-time cost and is incurred to receive a long-term benefit, such as the purchase of a fixed asset. In accounting terms, expenditure increases the value of assets or reduces a liability

Expenditure may be categorised into:

1. Capital Expenditure – Amount spent or liability incurred for purchasing assets. It may be incurred to acquire tangible assets or intangible assets. Example of capital expenditure are purchase of machinery to manufacture goods, purchase of furniture. Capital expenditure is shown on the assets side of the Balance Sheet. 
2. Revenue Expenditure – Amount spent or liability incurred for purchasing goods or services taken to earn revenue. It has direct relationship with revenue or with the accounting period, e.g. cost of goods sold, salaries, rent, electricity expenses, etc.
3. Deferred Revenue Expenditure – Expenses of revenue nature written off in more than one year. For example, large advertising expenditure that will give benefit for more than one accounting period is a Deferred Revenue Expenditure.             

                                           EXPENSE(STUDYNATIC)

           Amount spent or incurred to earn revenue. Such as salaries, wages, rent, etc.

There are two type of expense:

1. Prepaid Expense – It is an Expense that has been paid in advance and the benefit of which will be available in the following year or years. E.g. advance rent, insurance premium.
2. Outstanding Expense – It is an expense that has been incurred but has not been paid. E.g. outstanding salary, rent, subscription.

                                            INCOME(STUDYNATIC)

          Income is the profit earned during an accounting period. Income is the excess of revenue over expense. It is a broader term than the term ‘profit’ and includes profit from activities other than its Operating Activities. For example, goods costing 15,000 are sold for 21,000, the cost of goods sold, i.e., 15,000 in expense, the sale of goods, i.e., 21,000 is revenue and the difference, i.e., 6,000 is income.

                                            PROFIT(STUDYNATIC)

         Profit means income earned by the business from its Operating Activities, i.e., the activities carried out by the enterprise to earn profit. For example a plot was purchased at Rs 50,000 and three years later it was sold at Rs.  1, 50,000 then there is a profit of 1lakh.

Profit is further divided into:

1. Gross Profit – Excess of revenue over direct expenses.
2. Net Profit – Excess of total revenue and other income over total expenses. 

                                               GAIN(STUDYNATIC)

       A profit that arises from event or transaction which are incidental to business such as the sale of fixed assets, winning a court case, appreciation in the value of an assets A good example of gains in when you purchase like say a piece of land, house or security, and after some years you are able to dispose of at a price above the purchasing price.

                                                LOSS(STUDYNATIC)

        Loss is excess of expenses of a period over its revenues and other income. It decreases the owner’s equity. Money or money’s worth lost against which the firm receives no benefit, e.g., cash or goods lost in theft and loss arising from events of non- recurring nature, another e.g., a phone is bought at RS. 20,000 and a year later it was sold for RS. 12,000 then the seller made a loss RS. 8000.

                                        PURCHASES(STUDYNATIC)

         ‘Purchases’ means purchase of goods or raw materials for resale or for manufacturing of goods. The term ‘purchase’ includes both cash and credit purchase of goods.

                                   PURCHASE RETURN(STUDYNATIC)

         Goods purchased may be returned to the seller for any reason, say, they are defective. Goods so returned are known as Purchases Return or Returns Outward.

                                               SALES(STUDYNATIC)

      ‘Sales’ means sale of goods. The term ‘Sales’ include both cash and credit sales

                                      SALES RETURN(STUDYNATIC)

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

                                         REVENUE(STUDYNATIC)

        The amount of money that a producer receives in exchange for the sale of goods is known as revenue. In short, revenue means sales revenue. It is the amount received by a firm from the sale of a given quantity of a commodity at the prevailing price in the market.

                                           GOODS(STUDYNATIC)

        Goods purchased for resale or for manufacturing product. A Goods is a physical product capable of being delivered to a purchaser and involves the transfer of ownership from seller to customer. Goods also generally used to refer to commodities or items of all types, excepting service, being involved in trade or commerce.

                                            STOCK(STUDYNATIC)

           Stock refers to the total quantity of the commodity available with the producer for the present or future sale. Stock may be an opening stock and closing stock

1. Opening stock is the stock in hand in the beginning of accounting year. In other hand it is stock in hand at the end of the previous accounting year.
2. Closing stock is stock in hand at the end of the current accounting period.

                                          DEBTOR(STUDYNATIC)

 A person or an entity from whom amount is receivable against sale of goods or service both (debtor is a person or an entity who owes amount to the enterprise against credit sales of goods and/or service rendered or both.)

                                   BILL RECEIVABLE (STUDYNATIC)

       Bill receivable means a Bill Exchange accepted by a debtor, the amount of which will be received on the specified date.

                                        CREDITOR(STUDYNATIC)

       A person or entity to whom amount is payable against purchase of goods and service or both. (Creditor is a person or an enterprise to which an enterprise owes amount against credit purchases of goods and/or services taken or both.)

                                     BILL PAYABLE(STUDYNATIC)

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

                                              COST   (STUDYNATIC)

         Cost denotes the amount of money that a company spends on the creation or production of goods or service. It does not include the mark-up for profit. From a seller’s point of view, cost is the amount of money that is spent to produce a good or product.

                                       VOUCHER(STUDYNATIC)

               Voucher is a document evidencing a business transaction. It flows from the above definition that when a transaction is entered into, evidence to that effect is also established. Such evidences are source documents. On the basis of source documents, a voucher detailing the accounts that are debited and credited is prepared.

                                      DISCOUNT(STUDYNATIC)

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

There are three discounts are as follow:

1. 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. Dales are recorded at net value, i.e., sales- trade discount.
2. 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.
3. Rebate – Rebate is the discount allowed by the seller of goods to the purchaser for reasons other than for which trade discount or cash discount is allowed. It is allowed after the sale has been made. For example, discount allowed for poor quality of goods.

                                   BAD DEBTS(STUDYNATIC)

           Bad debt is the amount owed to the business that is written off because of it becoming irrecoverable. It is a loss for the business.

                                   BALANCE SHEET(STUDYNATIC)

                 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.

                                     BOOK VALUE(STUDYNATIC)

           This is the amount, at which an item exists in the books of account, i.e., Cost less depreciation.

                              COST OF GOODS SOLD(STUDYNATIC)

           Cost of goods sold is the direct cost attributable to the production of goods sold and service rendered.

                                          CREDIT(STUDYNATIC)

            An account has two parts, i.e., debit and credit. Credit is the right side of an account. If an account is to be credited, then the entry is posted to the credit side of the account.

                                          DEBIT(STUDYNATIC)

               An account has two parts, i.e., debit and credit. The left side is the debit side. If an account is to be debited, then the entry is posted to the debit side of the account.

                                   DEPRECIATION(STUDYNATIC)

             Depreciation is fall in the value of an asset because of usage or with efflux of time or obsolescence or accident. It is an allocation of cost of fixed asset in each accounting year during its estimated useful life.

                                        ENTITY(STUDYNATIC)

                An entity means an economic unit which performs economic activities (e.g., Reliance industries, Bajaj Auto, Maruti,). A business entity means an enterprise established in accordance with law to engage in business activities

                                        ENTRY(STUDYNATIC)

          A transaction and event when recorded in the books of account is known as an Entry.

                                    INSOLVENT(STUDYNATIC)

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

                                  PROPRIETOR(STUDYNATIC)

           The person who invests amount in business and bears all the risks associated with the business is called proprietor.

            FINANCIAL STATEMENT OR FINAL ACCOUNTS(STUDYNATIC)

           Statements Prepared at the end of the accounting period to determine financial performance and financial position. They are trading account, profit and loss account (Statement of profit & loss, in the case of companies) and Balance Sheet Prepared at the end of accounting process.

Question and Answer

Q1. Distinguish between Loss and Expense?

Ans –

I. Loss – Loss is excess of expenses of a period over its revenues and other income. It decreases the owner’s equity.Money or money’s worth lost against which the firm receives no benefit. E.g., cash or goods lost in theft and loss arising from events of non- recurring nature, another e.g., a phone is bought at RS. 20,000 and a year later it was sold for RS. 12,000 then the seller made a loss RS. 8000.

II. Expense – Expense are those costs that are incurred to maintain the profitability of business, like rent, wages, salaries, etc. These help in the production, business operations and generating revenues. E.g. when you pay arent your cash is reduced without a corresponding increase in another assets.

Q2. What are Vouchers?

Ans – Voucher is a document evidencing a business transaction. It flows from the above definition that when a transaction is entered into, evidence to that effect is also established. Such evidences are source documents. On the basis of source documents, a voucher detailing the accounts that are debited and credited is prepared.

Q3. Distinguish between Opening Stock and Closing Stock?

Ans –

1. Operating Stock – Opening Stock is the amount and value of material that a company has available for sale or use a the beginning of an accounting period. The opening Stock for the next reporting period is the same as the closing stock from the immediately preceding period.

II. Closing Stock – The closing stock is the inventory which is still in your business waiting to be sold for a given period.The closing stock can be in various forms such as raw materials, in-process goods (WIP) or finished goods.

Q4. Explain the meaning of any three of the following terms:

I. Assets

II. Capital

III. Goods

IV. Drawings

V. Debtors.

Ans –

I. Assets -. An asset is anything that has current or future economic value to a business. Essentially, for businesses ,assets include everything controlled and owned by the company that’s currently valuable or could provide monetary benefit in the future. Example of assets are land, building, machinery, furniture, stock, debtors, cash and bank balances, trademarks, copyrights, goodwill, etc. Assets can be classified into three type Non-current Assets, Current Assets, Fictitious Assets

II. Capital – Capital is the amount invested in an enterprise by the proprietor. It may be in the form of money of assets having a monetary value. It is a liability of the firm towards the proprietor. It is so because under “Business Entity Concept”, business is separate and distinct entity from its owners

III. Goods – Goods purchased for resale or for manufacturing product. A Goods is a physical product capable of being delivered to a purchaser and involves the transfer of ownership from seller to customer. Goods also generally used to refer to commodities or items of all types, excepting service, being involved in trade or commerce.

IV. Drawing – Drawings in accounting refer to the withdrawal from a business by its owner in the form of cashor any other asset aimed to speed for personal use rather than business use. For instance, if the owner pays house rent, or buys a car, or pays a child’s tuition fee, or goes on a vacation using business capital, then it is recorded as a reduction to the owner’s equity account or drawings

V. Debtors – It refers to individuals, people, or entities that owe money to another entity because they were supplied with good/services or borrowed money from an institution. Generally, debtors owe a lump sum, which is split up into monthly repayments over a predetermined period until the debt is finally paid off. Further more, debtors may need to pay interest on the original value of loan.

Q5. Explain the following terms:

ANS –

I. Revenue – The amount of money that a producer receives in exchange for the sale of goods is known as revenue. In short, revenue means sales revenue. It is the amount received by a firm from the sale of a given quantity of a commodity at the prevailing price in the market.

II. Debtor – It refers to individuals, people, or entities that owe money to another entity because they were supplied with good/services or borrowed money from an institution. Generally, debtors owe a lump sum, which is split up into monthly repayments over a predetermined period until the debt is finally paid off. Further more, debtors may need to pay interest on the original value of loan.

III. Fictitious Assets – Fictitious assets have no physical existence or realisable value, but the company shows them as cash expenditure in the books of accounts. They are a part of the assets column in the financial statements, and they are expenses or losses that so not get written off during the accounting period of their occurrence. An example of fictitious asset is deferred Revenue Expenditure such as Advertisement Expenditure.

IV. Working Capital – Working Capital indicates the liquidity levels of businesses for managing day-to-day expenses and covers inventory, cash, accounts payable ,accounts receivable and short- term debt. It is an indicator of the short-term financial position of an organisation and is also a measure of its overall efficiency.Working Capital = Current Assets – Current Liabilities This calculation indicates whether the company possesses sufficient assets to cover its short-term financial needs.

Q6. Explain the meaning of any three of the following terms:

Ans –

I. Liability – Liability usually means that you are responsible for something, and it can also mean that you owe someone money or services. For example, a homeowner’s tax responsibility can be how much he owes the city in property taxes or how much he owes the federal government in income tax. When a store charges a customer sales tax, the store must pay sales tax until the money is sent to the country, city, or state. Liabilities can help business set up profitable operation and speed up value growth. But if Liabilities aren’t managed well, they can cause big problem, like a drop in financial performance or even bankruptcy.

II. Stock

Stock refers to the total quantity of the commodity available with the producer for the present or future sale. Stock may be an opening stock and closing stock

i) Opening stock is the stock in hand in the beginning of accounting year. In other hand it is stock in hand at the end of the previous accounting year.

ii) Closing stock is stock in hand at the end of the current accounting period.

III. Business Transaction – A business transaction is a financial transaction between two or more parties that involves the exchange of goods, money, or services, to engage in a business transaction, the business exchange must be measurable in monetary value so it can be recorded for accounting purpose. Business transaction will affect the financials of the company involved.

IV. Drawings – Drawings in accounting refer to the withdrawal from a business by its owner in the form of cash or any other asset aimed to speed for personal use rather than business use. For instance, if the owner pays house rent, or buys a car, or pays a child’s tuition fee, or goes on a vacation using business capital, then it is recorded as a reduction to the owner’s equity account or drawings.

Q7. Explain and give example of each of the following accounting terms:

Ans –

I. Expenses – Expenses are those costs that are incurred to maintain the profitability of business, like rent , wages, depreciation, interest, salaries, etc. these help in the production, business operation and generating revenues.

II. Drawings – Drawings in accounting refer to the withdrawal from a business by its owner in the form of cash or any other asset aimed to speed for personal use rather than business use. For instance, if the owner pays house rent, or buys a car, or pays a child’s tuition fee, or goes on a vacation using business capital, then it is recorded as a reduction to the owner’s equity account or drawings.

III. Gain – A profit that arises from events or transaction which are incidental to business such as the sale of fixed assets, winning a court case, appreciation in the value of an assets. A good example of gains in when you purchase like say a piece of land, house or security, and after some years you are able to dispose of at a price above the purchasing price.

Q8. Define the following basic accounting terms with

example:

Ans –

I. Revenue – The amount of money that a producer receives in exchange for the sale of goods is known as revenue. In short, revenue means sales revenue. It is the amount received by a firm from the sale of a given quantity of a commodity at the prevailing price in the market.

II. Drawings – Drawings in accounting refer to the withdrawal from a business by its owner in the form of cash or any other asset aimed to speed for personal use rather than business use. For instance, if the owner pays house rent, or buys a car, or pays a child’s tuition fee, or goes on a vacation using business capital, then it is recorded as a reduction to the owner’s equity account or drawings.

III. Profit – Profit means income earned by the business from its Operating Activities, i.e., the activities carried out by the enterprise to earn profit. For example a plot was purchased at RS 50,000 and three years later it was sold at RS. 1, 50,000 then there is a profit of 1lakh.

Q9. Explain the following terms with example:

Ans –

I. Sales – Sales refers to the volume of goods and services sold by a business during a reporting period. When quantified into a monetary amount, it is positioned at the top of the income statement, after which operating and other expenses are subtracted to arrive at a profit or loss figure. Sales may also appear in the income statement as gross sales, after which sales return and allowances are deducted from it to show a net sales figure. The term can also refer to the selling organization of a business, and the activities this group engages in to secure orders from customers. Example buying something either from an online store or the store near to your house is an example of a sale. Where you ask for something, the seller provides you the answer. If you pay for the product and buy it, this transaction is the sale.

II. Cost – A cost is an expenditure required to produce or sell a product or get an asset ready for normal use. In other words, it’s the amount paid to manufacture a product, purchase inventory, sell merchandise, or get equipment ready to use in a business process.

Q10. Write a note on types of assets with one example of each?

Ans – The two main of assets are Current Assets and Non- Current Assets. These classifications are used to aggregates assets into different blocks on the balance sheet, so that one can discern the relative liquidity of the assets of an organization.

I. Current assets – Current Assets are expected to be consumed within one year, and commonly include the following line items: Cash and cash equivalents, Marketable securities, prepaid expenses, Accounts receivable, Inventory.

II. Non-current Assets – Non- current Assets are also known as long-term assets, and are expected to continue to be productive for a business for more than one year. The line items usually included in this classification are: Tangible fixed assets (such as buildings, equipment, furniture, land, and vehicles.), Intangible fixed assets (such as patents, copyrights, and trademarks), Goodwill.

Q11. Explain the following terms with examples:

Ans –

I. Capital Expenditure – A business is set to have incurred capital expenditure when the payment is made to acquire an asset, the benefit of which would be spread over several years. A business invests in capital expenditure to acquire new assets or to improve the performance of existing assets and is usually one- time expenditure. The hope is that investing in new assets or new technologies would increase revenue and bring substantial benefits to the business in the long run. Examples of capital expenditure include the purchase of land, vehicles, buildings, or heavy machinery.

II. Non-current Assets – Non-current assets are a company’s long-term investment that have a useful life of more than one year. Non-current assets cannot be converted to cash easily. They are required for the long-term needs of a business and include things like land and heavy equipment. Non-current assets may include items such as: Land, Property, Plant, and equipment, Trademarks, Long-term investments are Goodwill. When a company acquires another company. Non-current assets may be subdivided into tangible and intangible assets- such as fixed and intangible assets.

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