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Basic Accounting Terms

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Basic Accounting terms for those students who have just started to learn accounting. these terms are needed in whole accounting subject.

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Basic Accounting Terms

  1. 1. BASIC ACCOUNTING TERMS By: Prof. Bhavik R. Shah [M.Com ; M.Ed] 98 98 46 21 48
  2. 2. BUSINESS TRANSACTIONS              Business Transactions means exchange Of value for value (In Goods or Services against money) Measured in terms of money Relevant to the business Between to or more persons or firms For an event to be a business transaction Must possess the quality of economic substance Related to business and Affect the economic result and Must be capable of being measured in monetary terms There are mainly TWO types of transactions Cash transactions, which includes exchange of cash & Credit transactions, in which the payment of cash is promised to some future date.
  3. 3. CAPITAL Business and its owner are separate persons  The value of cash, goods or assets brought in the business by the owner is known as capital.  Capital shows the investment made by the owner.  Capital means excess of business assets over liabilities.  Capital = Total Assets – Total liabilities (External)  Net Assets = Total Assets – Total liabilities (External)  Net Worth = Total Assets – Total liabilities (External) Note: In capital transaction, Owner is given of value to the business. 
  4. 4. DRAWINGS  Business and its owner are separate persons  The value of cash, goods or assets withdrawn by the owner of the business is known as drawings. Drawings shows the decrease [reduction] in capital.  Note: In Drawings Transactions, Owner is Receiver of value From the business.
  5. 5. LIABILITIES   Any amount payable by the business To any outsider (other then owner) is known as liability. How Created?    By purchasing goods on credit, the amount becomes payable or liability is created. Liability is created by borrowing funds. Liability is created by borrowing services. There are TWO types of Liabilities:   Current liability [Amount payable within 1 Year ] Long-term liability [Amount payable after 1 year]
  6. 6. ASSETS Assets are     Items Having realizable value Used by the business for its operations and Owned by the business Examples: Cash, land, Building, Machinery, Stock of goods, Furniture, Goodwill, Patent, Copyright, trademark, Etc. are included in assets.
  7. 7. Assets are classified into THREE types:  Fixed Assets: Land, Building, Machinery, Furniture, Goodwill, Patent, Copyright, Trademark etc. which can be used for a long period are known as fixed assets.  Current Assets: Stock of goods, cash balance, Bank Balance, tools etc keep on changing with the transactions of the business, hence, they are known as current assets.  Fictitious Assets: Certain expenses, the benefit of which is available for more then one year, are not written off in one year but are known as fictitious assets. Preliminary expenses, discount on debentures, advertisement campaign expenses, etc. are examples of fictitious assets.
  8. 8. Other classification of Assets is:   Tangible assets land, Building, Machinery, Furniture, etc. which can be seen, touched, are known as tangible assets. Intangible assets Assets like goodwill, patent, copyright, trademark are valuable but cannot be seen or touched, therefore, they are known as intangible assets.
  9. 9. REVENUE  Revenue is the amount that business earns  By selling its products. By providing services to customers.   Revenues are the titled as  Sales Revenue Fees Commission Interest Dividends Royalties Received Rent Received        Revenue is recognized  When the goods or services are sold to the customer for cash * In credit sales also, though the amount is yet to be received revenue is recognized. For interest, Discount, Royalties, Rent, Commission Etc. * When they are due or accrued. 
  10. 10. EXPENDITURE    Expenditure is the amount of Resources Consumed For any benefit or services Resources are consumed Amount spent or paid or When the liability is created Examples: Machinery Purchased Salary Paid Wages Paid Furniture Purchased
  11. 11. EXPENSES     These are the cost incurred by a business in the process of earning revenues. Generally expenses are measured by • The cost of assets consumed OR • The cost of goods consumed • Services used • During the accounting period Examples: Depreciation, Rent paid, Wages, Salary, Interest, Cost of Heat, Light, Telephone Etc. If the benefit of Expenses is available to the business for more than one year is known as prepaid expenses.
  12. 12. INCOME   Income is the increase in the net worth of the organization either from business activity or other activities. Income is a comprehensive term, which includes profit also.  Profit occurs:  On sale of Goods and Services  On sale of Business Assets  Income is classified into Revenue Income:  Income received from the day to day transaction of the business is known as revenue income.  Capital Income: The income received on sale of any assets or on receipt of any long-term debt is known as capital income.  In accounting, income is the positive change in the wealth of the firm over a period of time.
  13. 13.  LOSS: LOSS & GAIN  Amount lost without getting any benefit is known as loss. For Example: Loss due to fire is a loss.  Excess of revenue expenses over revenue income is known as loss.  Results in decrease in owner’s capital or net assets or net worth over a period of 1 year is known as loss.  GAIN:  Gain or Profit is the excess of revenues over expenses during an accounting year.  Results in increase in Owner’s capital or net assets or net worth over a period of 1 year is known as Gain Or Profit.
  14. 14. PURCHASES  The items, in which the trader is trading are called goods.  Goods received by the trader for cash or on credit are known as purchases.  In a trading concern, purchases are made for resale with or without processing.  In a manufacturing concern, Raw materials are purchased, processed further into finished goods and then sold.
  15. 15. SALES:  Goods given by the trader for cash or on credit to the customer are known as sales. STOCK:  Goods; • • • •  Remaining unsold On hand At the end of the accounting period Is known as STOCK OF GOODS Stock is, • • • • Cost of Goods Purchased LESS Cost of Sold out of the Purchases This stock is known as closing stock Which becomes opening stock in the next year.
  16. 16. DEBTORS: Are Persons and other entities  Known as debtors or customers of the business.  To whom the goods or services are sold on credit and  The amount receivable. RECEIVABLES: Amount receivable from any person other than the debtors are known as receivables. For Examples: • Pre-paid expenses • Income due but not received • Outstanding income are known as receivables. 
  17. 17. CREDITORS: Are Persons and other entities  Known as creditors or suppliers of the business.  From whom the goods or services are purchased on credit and  The amount is payable. PAYABLE: Amount payable to any person other than the creditors are known as payables. For Examples: • Outstanding expenses • Income received in advance are known as payables. 
  18. 18. DEBIT: To debit means recording an amount on the debit side (Left-hand side) of a ledger account. The name of account credited should be written in the column of particulars. CREDIT: To credit means recording an amount on the credit side (Right hand side) of a ledger account. The name of account debited should be written in the column of particulars.
  19. 19. Methods or Systems of Accounting There are TWO methods of accounting: 1. 2. Double Entry Accounting System As the name suggests, in book-keeping, each transaction is given 2 (Double) effects (i) Debit Effects & (ii) Credit Effect. The amount debited is equal to the amount credited. This method is used in many countries of the world including India, as it is the scientific method of accounting. Deshi Nama Accounting System This book-keeping system, which was used in the ancient times is still prevalent. This is similar to, double entry system but it is structurally different from double entry system. In this system, one book is Rojmel, which satisfies the requirement of cash book and journal and the other book is khatabahi (Ledger). This system is also known as "Bahi Khata“ system.