Basic Accounting Terms

The following are the different terms that are used in accounting language some of them are presented below.

Entity:

An entity is an economic unit which performs economic activates e.g. Reliance Industries, Deepika Technologies Ltd.

Event:

It is transaction or happening which effects an entity.

Business Transaction:

A transaction is an exchange of goods or services for cash or credit. It involves transfer of money or money’s worth that brings about change in the financial position of a business.

Trade debtors:

The term ‘Trade debtor’ refers to the persons from whom the amounts are due for good sold or services rendered on credit.

Trade Creditors:

It refers to the persons to whom the amounts are due for goods purchased or services rendered on credit basis.

Capital:

This is the amount invested by the owner in the business. Capital can be invested in the form of cash or kind.

Drawings:

This is the cash or goods or any other asset withdrawn by owner from the business for his personal use.

Goods:

Goods are those which the business concern trades with. They are meant for resale not for use in the business. There is a difference between goods and asset. A cement dealer purchases goods means purchase of cement which are meant for resale, that is the purpose of the business. If he purchases a truck to deliver cement to the customers’ place, the truck is known as asset. It is not meant for sale.

Asset:

It refers to tangible or intangible or intangible objects, which carry future benefits. Assets are expected to yield future economic benefits. Assets are of to two types.

            1. Current Assets:

Current Assets are those assets which are held in cash or it is likely to be converted into cash during the accounting year. For example, cash, cash at bank, stock of raw materials, work in process, furnished goods, trade debtors, bills receivable etc.,

            2. Fixed Assets:

Fixed Assets are those assets which are not held for resale in Normal course of business, but are used for the purpose of production of goods or services. Fixed assets may be classified into two types there are Tangible Fixed Assets and Intangible Fixed Assets.

I. Tangible Fixed Assets:

These assets can be seen and touched. Example, buildings, machinery, furniture etc.

II. Intangible Fixed Assets:

These Assets are invisible, can not be seen or touched. It can only be felt. Example: Goodwill, patents, trade marks, copy rights etc.

Liabilities:

Liabilities refer to the financial obligation of an enterprise other than owner’s investment. It may be current liability or long term liability. Current liabilities refer to the liabilities which fall due in a short period i.e. payable during the accounting year. Example, Trade creditors, bills payable, outstanding expenses etc, Long term liabilities refers to those liabilities which do not fall due for payment in a relatively short period. Normally payable beyond one year. Example: Debentures, Long term loans usually on interest basis.

Purchases:

The term purchases refers to the total amount of goods obtained by an enterprise for resale or for use in the production of goods or rendering services in the normal course of business.

Sales:

The term ‘sales’ refers to the amount for which goods are sold or services are rendered. The sales may be for cash or credit.

Expenditure:

The term expenditure refers to the amount incurred in the process of acquiring goods, assets or services may be paid immediately or to be paid in future. The expenditure may be capital expenditure or revenue expenditure.

Income:

It is the amount earned by business due to its business transaction/operations.

Debit and Credit:

These are the two different aspects of business transactions.

Journal:

This is a book of original entry/first entry in which transactions are recorded in chronological order and the transaction recorded in journal called journal entry.

Account:

It is the statement (T-shape) in which the transactions relating to a person, entity, asset, liability, income, expenditure are recorded in terms of debit and credit.

Ledger:

This is a book of secondary entry. This is also called book of final entry. All transactions from journal are recorded in ledger by opening a separate account and their balances are found.

Revenue:

The term revenue refers to the amount charged for the goods sold or services rendered by an enterprise of permitting others to use enterprise’s resources yielding interest, royalty and divided. Example, sales, commission earned, interest earned, divided earned on investments.

Entry:

Entry is the record made in the books of accounts in respect of transaction or even an entry is passed on the basis of vouchers.

Voucher:

Voucher is a document which serves as an evidence of a transaction. The vouchers act as source document on the basis of which transactions are entered in the books of account. Example: For cash purchases, cash memo, and in case of credit purchases, purchase invoice serves as vouchers.

Net Profit:

It means excess of Revenue over expenditure.

Net Loss:

It means excess of expenses and losses over revenues.