5. Basic terms in Accounting

BASIC TERMS USED IN ACCOUNTING

Entity

• An entity means an economic unit which performs economic activities e.g., Bajaj Auto,
• Maruti, TISCO.

 Account

• It is a summarized record of
• relevant transactions at one place
• relating to a particular head. It records not only the amount of transactions
•  but also reflect the direction of the account.

• ENTRY

• A transaction and event when recorded in the books of accounts is known as an Entry

• Transaction

• It is a financial happening entered into by two or more willing parties.
• It effects a change in the asset, liability, or net worth account.
• It is recorded first in journal and then posted into the ledger Examples of a transaction are sale of goods, purchases of goods, receipt from debtors, payment made to creditors,
• purchase or sale of fixed assets, payment of dividend, etc.

• Proprietor

• is the person who makes the investment and bears all the risks and rewards of the business

Debtor is

•  a person or firm or company which owes amount to the enterprise on account of credit sale of goods or services.
•  The amount due from him is a debt.
•  The amount due from a person as per the books of the account is called a book debt.

• Drawings

• It is the amount of money or the value of goods which the proprietor or a partner takes for his domestic or personal use.
•  Drawing reduces the investment (or capital) of the owners.
•  It appears only in the accounts of sole proprietorship firms and partnership firms.

• Purchases

•  The term purchases are used only for purchases of goods.
•  Goods are those items which are purchased for resale or
•  for manufacture of products which are also to be sold.
•  It includes both cash and credit purchases

• Depreciation

•  It is a fall in the value of an asset
•  because of usage; or
•  with passage of time; or
•  obsolescence; or
•  accident

• Purchases Return:

•  Goods purchased may be returned due to any reason, say, they are not as per specifications or are defective.
•  Goods returned are termed as Purchases Return or Returns Outward.

• Sale

•  This term is used for the sale of goods dealt by the enterprise.
•  The term ‘Sales’ includes both Cash and Credit Sales.
•  When goods are sold for cash, they are cash sales
•  When goods are sold and payment is to be received at a later date, they are credit sales.

• Sales Return or Returns Inwards

•  It means Goods sold returned by the purchaser.

Discount

• A reduction in the price of goods is Discount.

           Trade Discount

• It is a discount allowed to a customer on the basis of quantity of goods purchased.

           Cash Discount

•  It is a discount allowed to a customer for making prompt or timely payment.

• Capital

•  It means the amount (in terms of money or assets having money value)
•  Which the proprietor has invested in the business
•  and can claim from it.
•  It is a liability of the business towards the owner.
• It is so because of Business Entity Concept.
• Capital = Assets – Liabilities

• Gain

•  It is a profit that arises from transactions which are incidental to business such as
•  sale of investments or fixed assets
•  at more than their book values.
• Gain may be operating gain or non-operating gain.

• Cost

• It is the amount of expenditure
•  incurred on or
•  attributable to
•  a specified article, product or activity.

• Creditor is

•  a person or firm or company to whom the enterprise owes amount on account of Credit purchase of goods or services.

• Assets:

•  Assets are property or legal rights
•  owned by an individual or business
•  to which money value can be attached.
•  In other words, anything which will enable the firm to get cash or a benefit in the future,

• Bad Debt

•  It is the amount that has become irrecoverable
•  It is a business loss, and
•  Thus, is debited to Profit and Loss Account.

• Insolvent

• Insolvent is a person or an enterprise which is not in a position to pay its debts.

• Liabilities

•  Liabilities means the amount
•  which the business owes to outsiders,
•  excepting the proprietors.
•  Liabilities can be classified in
•  (i) Long-Term Liabilities (ii) Current Liabilities,
•  This can be expressed as: Liabilities = Assets – Capital

• Goods

•  They refer to items forming part of the stock-in-trade of an enterprise,
•  which are purchased or manufactured with a purpose of selling.
•  In other words, they refer to the products in which an enterprise is dealing.

• 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.

• Profit

•  Profit is the surplus of revenues of a business over its costs.
•  Profit is categorized into:

1. Gross Profit: Gross Profit is the difference between sales revenue or the proceeds of goods sold and/or services rendered over its direct cost.
2. Net Profit: Net Profit is the profit made after allowing for all expenses. In case expenses are more than the revenue; it is Net  Loss.

• Loss

•  Loss is excess of expenses over its related revenues which may arise from normal business activities.
•  It decreases the owner’s equity.
• It also refers to money or money’s worth lost (or cost incurred) against which the enterprise receives no benefit, e.g., cash or goods lost in theft.
•  It also arises from events of non-recurring nature, e.g., loss on sale of fixed assets

• Expense

• An expense is the amount spent in order to produce and sell the goods and services which produce the revenue.
•  Expense is the cost of the use of things or services for the purpose of generating revenue.
•  Expense is that part of the expenditure which has been consumed during the current accounting period.
•  Examples of expense are payment of salaries, wages, rent, etc.

• Expenditure:

• An expenditure is the amount spent or liability incurred for the value received
•  Expenditure may be categorised into: (i) Capital Expenditure (ii) Revenue Expenditure
•  An expenditure is a payment (or a money sacrifice) for a benefit received.

• Capital Expenditure

•  It is the amount spent in purchasing assets which will give benefit over more than one accounting period.
•  It means expenditure incurred to acquire fixed assets or its improvement.
•  Capital expenditure is debited to particular asset account.
•  They appear at the assets side of the Balance Sheet.

• Revenue Expenditure

•  It is the amount spent to purchase goods and services that are consumed during the accounting period.
•  It is shown in the debit side of the Profit and Loss Account

• Revenue

•  It is the gross inflow of cash, receivables or other consideration
•  arising in the ordinary course of business activities
•  from the sale of goods, rendering of services,
•  and use by others of enterprise resources yielding interest, royalties and dividends

• Income:

•  Income is the profit earned during an accounting period.
•  In other words, the difference between revenue and expense is called income.
•  Income = Revenue – Expense