Business Accounts Tutorial | Accounting Terminologies

Basic accounting terms which are used in day-to-day working of the business are as follows:

Capital

It is also known as owner’s equity, proprietorship and net worth. It refers to the amount which the proprietor invests in the firm or can claim from the firm. For a business, capital is a liability towards the owner. Owner’s Equity is the owner’s claim against the assets. It is amount left after deducting liabilities from the assets, i.e.,

 

Capital = Assets – Liabilities

 

Liability

Liabilities refer to the amount which an organization is obliged to pay to the outsiders, other than the proprietors. Therefore, liability is the claims of those who are not owners. From the equation above we get, Liabilities = Assets – Capital

 

Type of Liabilities

-Fixed liabilities : Those liabilities whose term of payment is usually more than one year i.e., the payment is made after a long period of time e.g., long-term loans, debentures, etc.

-Current liabilities : Those liabilities which are payable generally within one year. e.g. short-term loans, bills payable, creditors, etc.

 

Assets

Assets are valuables which enable the firm to get cash or a benefit in future. Example – Cash, furniture, machines, buildings, stock of goods, bills receivables etc.

 

Type of assets

-Fixed Assets: The assets which are purchased for the purpose of business operations but are not meant for sale. Example – land, building, machinery, furniture etc.

-Current assets : The assets which are easily convertible into cash within a short-period of time, also called liquid assets. Example – Inventory, bank balance, bills receivables etc.

 

Revenue

Revenue is an inflow of assets which results in an increase in the owner’s equity. Example – receipts from the sale of goods, rent income, interest received etc.

 

Expenses

Expenses refer to the cost incurred by the business for the purpose of generating revenue. Example – salaries, wages, rent paid, interest paid etc.

 

Income

The difference between revenue generated and incurred expense (if revenue is more than expense) is called income also known as profit. For example if the cost of producing a single unit of a product is Rs. 1,000 and the revenue generated from the sale of a unit is Rs. 1,500, then the income/profit from the sale of a single unit is Rs.500. In terms of an equation,

Income = Revenue – Expense

 

Purchases

The word purchase in a business is used for the purchase of goods, where goods are those things which help in producing finished products or which are purchased for resale.

Type of purchases

 

-Cash purchases: Goods purchased for cash are called cash purchases.

-Credit purchases: Goods purchased on credit are called credit purchases.

 

Sales

This term is used for the sale of goods only.

 

Type of Sales

 

Cash sales: Goods sold for cash are called cash sales.

-Credit sales: Goods which are sold but the payment is not received at the time of sale is referred to as

-Credit sales. Ratherthe payment is received after a certain period.

 

Stock

Stock refers to the goods lying unsold on a particular date. The stock is valued on the basis of cost of the goods or market price whichever is less.

Type of stocks

Opening stock: It refers to the goods lying unsold in the beginning of the accounting year.

Closing stock: It refers to the goods lying unsold at the end of the accounting year.

 

Debtors

A person who owes money to the firm mostly on account of credit sales of goods is called a debtor. Example – When goods are sold to a person on credit that person pays the price in future.

 

Creditors

A person to whom the firm owes money is called a creditor. Example – When the firm purchases goods on credit from an entity and is liable to pay the price in future. The entity from whom goods are purchased is a creditor to the firm.

 

Losses

Loss refers to something against which the firm receives no benefit. It may also be noted that when expenses exceeds revenue it leads to losses. Example – Theft, fire, etc.

 

Proprietor

The person who makes the investment and bears all the risks connected with the business is called the proprietor.

 

Drawings

It is the amount of money or the value of goods which the proprietor/owner takes for his domestic or personal use.

 

Discount

The amount of rebate that a customer gets on the price of goods sold is called discount.

 

Type of Discounts

-Trade discount: The discount allowed on the price of goods sold on the basis of sales of the items is called trade discount.

-Cash discount: The discount allowed on the prices of goods for quick payment is called cash discount.

 

Events

An Event is an incident which may or may not be evaluated in terms of money and may or may not be connected with transactions recorded in the book. It may be noted that “Every transaction is an event, but all the events are not transactions”. Example – Rent paid for land taken on lease is an example of event, but it is not a transaction.

 

Entry

The recording of a transaction in the books of accounts of an organization is known as entry. There are several books maintained by an organization, which are together called as Books of Accounts and the transaction recorded in the Journal book is called journal entry or a transaction recorded in the Ledger book is called a ledger entry.

 

Entity

All elements of a financial statement are associated to a particular entity which may be a business house, a government unit, an educational organization or an entity of the same type which may consists of subsidiary company that is a part of the same entity as its parent company in consolidated financial statements but is an ‘other entity’ in the separate financial statements of its parent. An entity may encompass of two or more allied entities and may not necessarily be a legal entity. Thus the accounting information is recorded, compiled and presented with reference to an identifiable entity.

 

Transaction

A transaction can be defined as a financial happening that affect the finances of the business.

 

Type of transactions

-Cash transaction: Cash paid immediately on entering into a transaction, is called a cash transaction.

-Credit transaction : If on entering into a transaction, one promises to pay the price later is called a credit transaction