Basic Accounting Terms::
The understanding of the subject becomes easy when one has the knowledge of a few important terms of accounting. Let us go through some of them.
Transactions
Transactions are those activities of a business, which involve transfer of money or goods or
services between two persons or two accounts. For example, purchase of goods, sale of
goods, borrowing from bank, lending of money, salaries paid, rent paid, commission
received and dividend received. Transactions are of two types, namely, cash and credit
transactions.
Cash Transaction is one where cash receipt or payment is involved in the transaction. For
example, When You buys goods from a seller paying the price of goods by cash
immediately, it is a cash transaction.
Credit Transaction is one where cash is not involved immediately but will be paid or
received later. In the above example, if You, do not pay cash immediately but promises to
pay later, it is credit transaction.
Proprietor
A person who owns a business is called its proprietor. He contributes capital to the business
with the intention of earning profit.
Capital
It is the amount invested by the proprietor/s in the business. This amount is increased by the
amount of profits earned and the amount of additional capital introduced. It is decreased by
the amount of losses incurred and the amounts withdrawn. For example, if Mr. Ram starts
business with Rs.10,00,000, his capital would be Rs.10,00,000.
Assets
Assets are the properties of every description belonging to the business. Cash in hand, plant
and machinery, furniture and fittings, bank balance, debtors, bills receivable, stock of
goods, investments, Goodwill are examples for assets. Assets can be classified into tangible
and intangible.
Tangible Assets: These assets are those having physical existence. It can be seen and
touched. For example, plant & machinery, cash, etc.
Intangible Assets: Intangible assets are those assets having no physical existence but their
possession gives rise to some rights and benefits to the owner. It cannot be seen andtouched. Goodwill, patents, trademarks are some of the examples.
Liabilities
Liabilities refer to the financial obligations of a business. These denote the amounts which a
business owes to others, e.g., loans from banks or other persons, creditors for goods
supplied, bills payable, outstanding expenses, bank overdraft etc.
Drawings
It is the amount of cash or value of goods withdrawn from the business by the proprietor for
his personal use. It is deducted from the capital.
Debtors
A person (individual or firm) who receives a benefit without giving money or money’s
worth immediately, but liable to pay in future or in due course of time is a debtor. The
debtors are shown as an asset in the balance sheet. For example, Mr. Ravi bought goods on
credit from Mr. Ram for Rs.10,000. Mr. Ravi is a debtor to Mr. Ram till he pays the value
of the goods.
Creditors
A person who gives a benefit without receiving money or money’s worth immediately but
to claim in future, is a creditor. The creditors are shown as a liability in the balance sheet. In
the above example Mr. Ram is a creditor to Mr. Ravi till he receive the value of the goods.
Purchases
Purchases refers to the amount of goods bought by a business for resale or for use in the
production. Goods purchased for cash are called cash purchases. If it is purchased on
credit, it is called as credit purchases. Total purchases include both cash and credit
purchases.
Purchases Return or Returns Outward
When goods are returned to the suppliers due to defective quality or not as per the terms of
purchase, it is called as purchases return. To find net purchases, purchases return is
deducted from the total purchases.
Sales
Sales refers to the amount of goods sold that are already bought or manufactured by the
business. When goods are sold for cash, they are cash sales but if goods are sold and
payment is not received at the time of sale, it is credit sales. Total sales includes both cash
and credit sales.
Sales Return or Returns Inward
When goods are returned from the customers due to defective quality or not as per the terms
of sale, it is called sales return or returns inward. To find out net sales, sales return is
deducted from total sales.
Stock
Stock includes goods unsold on a particular date
Stock includes goods unsold on a particular date. Stock may be opening and closing stock.
The term opening stock means goods unsold in the beginning of the accounting period.
Whereas the term closing stock includes goods unsold at the end of the accounting period.
For example, if 5,000 units purchased @ Rs. 30 per unit remain unsold, the closing stock is
Rs. 1,50,000. This will be opening stock of the subsequent year.
Revenue
Revenue means the amount receivable or realised from sale of goods and earnings from
interest, dividend, commission, etc.
Expense
It is the amount spent in order to produce and sell the goods and services. For example,
purchase of raw materials, payment of salaries, wages, etc.
Income
Income is the difference between revenue and expense.
Voucher
It is a written document in support of a transaction. It is a proof that a particular transaction
has taken place for the value stated in the voucher. It may be in the form of cash receipt,
invoice, cash memo, bank pay-in-slip etc. Voucher is necessary to audit the accounts.
Invoice
Invoice is a business document which is prepared when one sell goods to another. The
statement is prepared by the seller of goods. It contains the information relating to name and
address of the seller and the buyer, the date of sale and the clear description of goods with
quantity and price.
Receipt
Receipt is an acknowledgement for cash received. It is issued to the party paying cash.
Receipts form the basis for entries in cash book.
The understanding of the subject becomes easy when one has the knowledge of a few important terms of accounting. Let us go through some of them.
Transactions
Transactions are those activities of a business, which involve transfer of money or goods or
services between two persons or two accounts. For example, purchase of goods, sale of
goods, borrowing from bank, lending of money, salaries paid, rent paid, commission
received and dividend received. Transactions are of two types, namely, cash and credit
transactions.
Cash Transaction is one where cash receipt or payment is involved in the transaction. For
example, When You buys goods from a seller paying the price of goods by cash
immediately, it is a cash transaction.
Credit Transaction is one where cash is not involved immediately but will be paid or
received later. In the above example, if You, do not pay cash immediately but promises to
pay later, it is credit transaction.
Proprietor
A person who owns a business is called its proprietor. He contributes capital to the business
with the intention of earning profit.
Capital
It is the amount invested by the proprietor/s in the business. This amount is increased by the
amount of profits earned and the amount of additional capital introduced. It is decreased by
the amount of losses incurred and the amounts withdrawn. For example, if Mr. Ram starts
business with Rs.10,00,000, his capital would be Rs.10,00,000.
Assets
Assets are the properties of every description belonging to the business. Cash in hand, plant
and machinery, furniture and fittings, bank balance, debtors, bills receivable, stock of
goods, investments, Goodwill are examples for assets. Assets can be classified into tangible
and intangible.
Tangible Assets: These assets are those having physical existence. It can be seen and
touched. For example, plant & machinery, cash, etc.
Intangible Assets: Intangible assets are those assets having no physical existence but their
possession gives rise to some rights and benefits to the owner. It cannot be seen andtouched. Goodwill, patents, trademarks are some of the examples.
Liabilities
Liabilities refer to the financial obligations of a business. These denote the amounts which a
business owes to others, e.g., loans from banks or other persons, creditors for goods
supplied, bills payable, outstanding expenses, bank overdraft etc.
Drawings
It is the amount of cash or value of goods withdrawn from the business by the proprietor for
his personal use. It is deducted from the capital.
Debtors
A person (individual or firm) who receives a benefit without giving money or money’s
worth immediately, but liable to pay in future or in due course of time is a debtor. The
debtors are shown as an asset in the balance sheet. For example, Mr. Ravi bought goods on
credit from Mr. Ram for Rs.10,000. Mr. Ravi is a debtor to Mr. Ram till he pays the value
of the goods.
Creditors
A person who gives a benefit without receiving money or money’s worth immediately but
to claim in future, is a creditor. The creditors are shown as a liability in the balance sheet. In
the above example Mr. Ram is a creditor to Mr. Ravi till he receive the value of the goods.
Purchases
Purchases refers to the amount of goods bought by a business for resale or for use in the
production. Goods purchased for cash are called cash purchases. If it is purchased on
credit, it is called as credit purchases. Total purchases include both cash and credit
purchases.
Purchases Return or Returns Outward
When goods are returned to the suppliers due to defective quality or not as per the terms of
purchase, it is called as purchases return. To find net purchases, purchases return is
deducted from the total purchases.
Sales
Sales refers to the amount of goods sold that are already bought or manufactured by the
business. When goods are sold for cash, they are cash sales but if goods are sold and
payment is not received at the time of sale, it is credit sales. Total sales includes both cash
and credit sales.
Sales Return or Returns Inward
When goods are returned from the customers due to defective quality or not as per the terms
of sale, it is called sales return or returns inward. To find out net sales, sales return is
deducted from total sales.
Stock
Stock includes goods unsold on a particular date
Stock includes goods unsold on a particular date. Stock may be opening and closing stock.
The term opening stock means goods unsold in the beginning of the accounting period.
Whereas the term closing stock includes goods unsold at the end of the accounting period.
For example, if 5,000 units purchased @ Rs. 30 per unit remain unsold, the closing stock is
Rs. 1,50,000. This will be opening stock of the subsequent year.
Revenue
Revenue means the amount receivable or realised from sale of goods and earnings from
interest, dividend, commission, etc.
Expense
It is the amount spent in order to produce and sell the goods and services. For example,
purchase of raw materials, payment of salaries, wages, etc.
Income
Income is the difference between revenue and expense.
Voucher
It is a written document in support of a transaction. It is a proof that a particular transaction
has taken place for the value stated in the voucher. It may be in the form of cash receipt,
invoice, cash memo, bank pay-in-slip etc. Voucher is necessary to audit the accounts.
Invoice
Invoice is a business document which is prepared when one sell goods to another. The
statement is prepared by the seller of goods. It contains the information relating to name and
address of the seller and the buyer, the date of sale and the clear description of goods with
quantity and price.
Receipt
Receipt is an acknowledgement for cash received. It is issued to the party paying cash.
Receipts form the basis for entries in cash book.
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