Basic Accounting Terms

Basic Accounting Terms:

1. Account :

                          A formal record of a particular type of transaction expressed in money or other units of measurement and kept in a ledger. In other words, Account is a summary of relevant business transactions at one place relating to a person, asset, expense revenue named in the heading. An account is a brief history of financial transactions of a particular person or item. It is a "T" shaped proforma, which has two sides called the debit side (Left side) and credit side (Right side).

2.ACCOUNTING ENTRY:

                                       A record of financial transaction in the books of accounts, eg. Journal, Cashbook Etc.

3. TRANSACTIONS :

                                Transactions are those activities of a business, which involve the transfer of money or goods or services between two persons or two accounts. For example, purchase of goods, sale of goods, borrowing from the bank, lending of money, salaries paid, rent paid, the commission received and dividend received. Transactions are of two types, namely, cash and credit transactions. Every transaction brings about change in the financial position of Business.

4. Accounting Period:

                               The period of time, for which an operating statement is prepared.

5. PROPRIETOR:

                          A person who owns a business is called as a proprietor. He contributes initial money to commerce business called capital with an intention of earning the profit.

6. CAPITAL:

                  It is the amount invested in the business by the proprietor. This amount is increased by the number of profits earned and the amount of additional capital introduced. It is decreased by the number of losses incurred and the amounts withdrawn by the proprietor for personal use.

7. ASSETS:

                 Assets are the proprietors or resources owned by the business. Cash in hand, plant, and machinery, furniture and fittings, bank balance, debtors, bills receivable, stock of goods, investments, goodwill are some examples of assets.
                                Assets can be classified into Tangible and Intangible.
   a) TANGIBLE ASSETS:
                              These are the assets having a physical existence, which can be seen and touched, eg. Plant, Machinery, Cash, etc.
   b)  INTANGIBLE ASSETS:
                                            These are the assets having no physical existence, but their possession gives to rise to some rights and benefits to the owner. It cannot be seen and touched. Goodwill, Patents, Trademarks are some of the examples.

8.LIABILITIES:

                       Liabilities refer to the financial obligations of a business. These denote the amounts which a business owes to others, eg. Loans from banks or other persons, creditors for goods supplied, bills payable, outstanding expenses, bank overdraft, etc.

9.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.

10. DEBTORS:

                      A person who receives a benefit without giving money or money's worth immediately, but liable to pay in the future or in due course of time is a debtor. Debtors may be traded debtor or general debtor. Trade debtor is one to whom goods are sold on credit and general debitor is one from whom some amount is receivable eg. Rent receivable from Raman. Debtors are shown as an asset in the Balance sheet.

11.CREDITORS:

   

                      A person who gives a benefit without receiving money or money's worth immediately but claims in the future is a Creditor. Creditors may be trade creditors and general creditors. A trade creditor is one who supplied goods on credit to the business and a general creditor is one to whom the business owes. Ex. A loan was taken from the bank, Salaries payable to employees, etc. The creditors are shown as a liability in the Balance sheet.

12.PURCHASES:

                         Purchases refer to the number 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.

13.SALES:

              Sales refer to the number of goods sold that are already bought or manufactured by the business. When goods are sold for cash, they are called Cash Sales, If goods are sold and payment is not received at the time of sale, it is called Credit Sales. Total sales include both cash and credit sales.

14. STOCK;

               

                  Stock includes goods unsold on a particular date. Stock may be opening and closing stock. The term Opening stock means goods unsold at the beginning of the accounting period. Whereas, the term closing stock includes goods unsold at the end of the accounting period.

15. REVENUE:

                       Revenue means the amount receivable or realized from the sale of goods and earnings from interest, dividend, commission, etc.

16.EXPENSE:

                   It is the amount spent in order to produce and sell goods and services. Ex. Purchase of raw materials, payment of salaries, wages, etc.

17.INCOME:

 
                 Income is the difference between revenue and expense.

18. VOUCHER:

   

                    It is a written document in support of a transaction. It is 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.

19. RECEIPT:
 

                   A receipt is an acknowledgement for cash received. it is issued to the party paying cash. Receipts form the basis for entries in the cash book.

20. GOODS:

                  Merchandise purchased in order to sell. it is a commodity which a trader buys and sells.