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Basic Accounting Terms & Terminology

Accountancy students are required to know some Basic Accounting Terms and Terminology to learn accounts in a great manner. See the below some of the basic terms and terminology of accounting for understanding accounting.

Basic Accounting Terms & Terminology:

Transaction :

It is an event that involves the exchange of some value between two or more entities. It can be a purchase of stationery, receipt of money, payment to a supplier, incurring expenses, etc. It can be a cash transaction or a credit transaction.

Purchases :

This term is used for goods to be dealt-in i.e. goods are purchased for resale or for producing the finished products which are meant for sale. Goods purchased may be Cash Purchases or Credit Purchases. Thus, the purchase of goods is the sum of cash purchases and credit purchases.

Sundry Creditors:

Creditors are persons who have to be paid by an enterprise an amount for providing goods and services on credit.

Sales :

Sales are total revenues from goods or services provided to customers. Sales may be in cash or in credit.

Sundry Debtors :

Persons who have to pay for goods sold or services rendered or in respect of contractual obligations. It is also termed as debtor, trade debtor, and accounts receivable.

Revenue (Sales) :

Sales revenue is the amount of selling products or providing services to customers. Other items of revenue common to many businesses are Commission, Interest, Dividends, Royalties, Rent received, etc.

Expenses :

Costs incurred by a business in the process of earning revenue are called expenses. In general, expenses are measured by the cost of assets consumed or services used during the accounting period. The common items of expenses are Depreciation, Rent, Wages, Salaries, Interest, Cost of Heating, Light and water, Telephone, etc.

Income :

The difference between revenue and expense is called income. For example, goods costing Rs 25000 are sold for Rs. 35000, the cost of goods sold, i.e. Rs. 25000 is an expense, the sale of goods, i.e. Rs. 35000 is revenue, and the difference. i.e. Rs.10000 is income. In other words, we can state that Income = Revenue - Expense

Gain :

Usually this term is used for profit of an irregular nature, for example, capital gain.

Loss :

It means something against which the firm receives no benefit. It is a fact that expenses lead to revenue but losses do not, such as theft.

Profit :

It is the excess revenue of a business over its costs. It may be gross profit and net profit. Gross profit is the difference between sales revenue or the proceeds of goods sold and/or services provided over the direct cost of the goods sold. Net profit is the profit made after allowing for all types of expenses. There may be a net loss if the expenses exceed the revenue.

Expenditure :

Spending money or incurring liability for some benefit, service, or property received is called expenditure. Payment of rent, salary, purchase of goods, purchase of machinery, etc. are some examples of expenditure. If the benefit of expenditure is exhausted within a year, it is treated as revenue expenditure. In case the benefit of an expenditure lasts for more than one year, it is treated as an asset and is also known as capital expenditure.

Expenditure is usually the amount spent for the purchase of assets. It increases the profit-earning capacity of the business. Expense, on the other hand, is an amount to earn revenue. Expenditure is considered as capital expenditure unless it is qualified with words like revenue expenditure on rent, salaries, etc., while expense is always considered as a revenue expense because it is always incurred to earn revenue.

Drawings :

It is the amount of money or the value of goods that the proprietor takes away from the business for his/her household or private use.

Capital :

It is the amount invested in an enterprise by its owners e.g. paid-up share capital in a corporate enterprise. It also refers to the interest of owners in the assets of an enterprise.

It is the claim against the assets of the business. Any amount contributed by the owner towards the business unit is a liability for the business enterprise. This liability is also termed as capital which may be brought in the form of cash or assets by the owner.

Assets :

These are tangible objects or intangible rights owned by the enterprise and carrying probable future benefits. Tangible items are those which can be touched and their physical presence can be noted/felt e.g. furniture, machine, etc. Intangible rights are those rights that one possesses but cannot see e.g. patent rights, copyrights, goodwill, etc. Assets are purchased for business use and are not for sale. They raise the profit-earning capacity of the business enterprise.

Assets are broadly categorized as current assets and non-current assets/fixed assets. Current assets are those assets that are held for a short period generally one year’s time. The balance of such items goes on fluctuating i.e. it keeps on changing throughout the year. The balance of cash in hand may change so many times in a day. Various current assets are cash in hand/at bank, debtors, bills receivable, stock, and pre-paid expenses.

Non-current assets :

Those assets are acquired for long-term use in the business. Such assets raise the profit-earning capacity of the business enterprise. Expenditure on such assets is non-recurring and of a capital nature. Expenses incurred on acquiring these assets are added to the value of the assets.

Liability :

It is the financial obligation of an enterprise other than owners’ funds. Liabilities: Liabilities mean the amount which the business owes to outsiders, that is, except the proprietors. In the words of Finny and Miller, “Liabilities are debts, they are amounts owed to creditors.” Thus, the claims of those who are not owners are called Liabilities.

This can be expressed as Liabilities = Assets – Capital

In business, transactions are recorded taking a business to be an entity distinct from its owners. Thus, capital invested by the proprietors is a liability but an internal liability. On the other hand, external liability is a liability that is payable to outsiders, i.e., other than the proprietors.

External liability arises because of credit transactions or loans raised. Examples of external liabilities are creditors, bank overdrafts, bills payable, and outstanding liabilities. Liabilities can be classified into the following :

i. Long-Term Liabilities :

These are those liabilities that are payable after a longterm, (generally more than a year). Examples of Long-Term Liabilities are long-term loans, debentures, etc.

ii. Short-Term/Current Liabilities :

These are liabilities that are payable in the near future (generally within a year). Examples of Current Liabilities are creditors, bank overdrafts, bills payable, short-term loans, etc.

Account :

An account is a summarised record of relevant transactions in one place relating to a particular head. It records not only the amount of transactions but also their effect and direction.

Stock or Inventory :

Stock is the tangible property held by an enterprise for the purpose of sale in the ordinary course of business or for the purpose of using it in the production of goods meant for sale or services to be rendered. Stock may be opening stock or closing stock. In case of a manufacturing concern, Closing Stock comprises raw materials, Work-in-Progress (i.e., semi-finished goods) and finished goods in hand on the closing date. Similarly, Opening Stock (beginning inventory) is the amount of stock at the beginning of the accounting period.

Goods :

They refer to items forming part of the Stock-in-Trade of an enterprise, which is purchased or manufactured with the purpose of selling. In other words, they refer to the products with which an enterprise is dealing. For an enterprise dealing in home appliances such as T.V., fridge, A.C., etc., these are goods. Similarly, for a stationer, stationery is goods, whereas, for others, it is an item of expense (not purchases). An enterprise may purchase assets for use in furtherance of business or stationery for use in the business, but they are not purchases of ‘goods’ but fixed assets and expenses respectively.

Receivables :

The term ‘Receivables’ includes the outstanding amount due from others. Sometimes, a debtor may accept a Bill of Exchange, which is payable after a certain period. Such a bill is known as Bill Receivable. Sometimes, a debtor promises to pay the specific amount in writing after a specified period. Such a promise is known as a Promissory Note and is recorded as a note receivable. The term – accounts receivable includes trade debtors as well as bills receivable and promissory notes receivable. The term receivable includes all the amounts due from others.

Payables :

The term ‘Payables’ include the amounts due to other. Accounts Payable include trade creditors as well as bills payable and promissory notes payable. The term payable includes all the amounts due to others.

Bill Receivable :

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

Bill Payable :

Bill Payable means a Bill of Exchange, the amount of which will be payable on the specified date.

Event :

Any transactions in an organisation can be called as an event. Transactions in an organisation have documentary evidence and will create a change in revenue, expense, assets, liabilities, and capital.

Cost :

It is the amount of expenditure incurred on or is attributed to a specified article; product or activity.

Voucher :

It is proof of a business transaction. Cash memos, bills/Invoices, Credit/Debit notes etc. are examples of vouchers.

Discount :

Some customers are allowed a reduction in the price of goods by the business. It is called a Discount.

Trade Discount :

It is the reduction allowed by the seller to the buyer at the time of sale on the list price of goods. Trade discount is allowed on bulk purchases. Normally, a trade discount is deducted from the list price and only the balance is accounted for. Therefore, trade discounts will not be shown in the books of accounts.

Cash Discount :

It is the deduction allowed by the creditor to the debtor on the amount due by the latter. This concession is given only to those who settle their accounts within a stipulated period. Therefore, cash discounts encourage prompt settlement of accounts. For the debtor who pays the amount, it is an income. For creditors, a cash discount is an expense.

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