Business Transaction
‘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
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
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
It is the amount withdrawn or goods taken by the proprietor or partner for personal use.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
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:
- 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.
- 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
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:
- Non-current Assets
- Current Assets
- Fictitious Assets
- 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:
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
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.
II. 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.
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.
RECEIPTS
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:
- 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.
- 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
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 categorized into:
- 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.
- 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.
- 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
Amount spent or incurred to earn revenue. Such as salaries, wages, rent, etc.
There are two type of expense:
- 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.
- Outstanding Expense – It is an expense that has been incurred but has not been paid. E.g. outstanding salary, rent, subscription.
INCOME
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
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:
- Gross Profit – Excess of revenue over direct expenses.
- Net Profit – Excess of total revenue and other income over total expenses.
GAIN
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
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
‘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
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
‘Sales’ means sale of goods. The term ‘Sales’ include both cash and credit sales
SALES RETURN
Goods sold when returned by the purchaser are termed as Sales Return or Returns Inward.
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.
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.
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
- 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.
- Closing stock is stock in hand at the end of the current accounting period.
DEBTOR
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
Bill receivable means a Bill Exchange accepted by a debtor, the amount of which will be received on the specified date.
CREDITOR
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
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
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
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
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:
- 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.
- 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.
- 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
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
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
This is the amount, at which an item exists in the books of account, i.e., Cost less depreciation.
COST OF GOODS SOLD
Cost of goods sold is the direct cost attributable to the production of goods sold and service rendered.
CREDIT
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
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
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
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
A transaction and event when recorded in the books of account is known as an Entry.
INSOLVENT
Insolvent is a person or enterprise which is not in a position to pay its debts.
PROPRIETOR
The person who invests amount in business and bears all the risks associated with the business is called proprietor.
FINANCIAL STATEMENT OR FINAL ACCOUNTS
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.