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There are two basic financial statements which are prepared by an enterprise: 1. Profit & Loss Statement, and 2.

Balance Sheet.

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Accounting Equation
The three components of a balance sheet can be stated in the form of following basic accounting equation Assets = Liabilities + Capital (owners equity) eg: Rs.50,000=Rs. 10,000+Rs.40,000

buildings. Assets These are economic resources of an enterprise that can be usefully expressed in monetary terms. It can be a purchase of goods. relate to business and affect the economic results. payment to creditors for goods and expenses. For example. bills receivable (notes receivable). temporary investment in securities. collection of money.000 by the creditors(liabilities). and Rs. which is used by it for delivering food stuff.  Fixed Assets are assets held on a long term basis. Business Transactions It is an economic event that relates to a business entity. Liabilities . cash and bank balances. furniture and fixtures. an event must be capable of being measured in monetary terms and related to business enterprise in terms of economic consequence. Also See: Stock Exchange Terminologies  Stock Market Terms The place where company stock and derivatives are traded at an agreed price is called a stock market or equity market.000 by the owner (capital).This equation tells at a glance that the resources of this enterprise total Rs. such as land. stock (inventory). machinery. This item will be shown of the asset side of the balance sheet of Departmental Store. In other words.40. 10. An event to be a transaction must possess the quality of economic substance. Departmental Store owns a fleet of trucks. Assets are things of value used by the business in its operations.000 and these assets are financed by two sources — Rs. also known as outsiders claims. provides economic benefits to the enterprise. Assets can be broadly classified into two types: Fixed Assets and Current Assets. thus. the trucks. These assets are used for doing business and not for re-sale in normal course of operation. also known as owner equity. Normally the short term refers to an accounting year.  Current Assets are assets held on a short term basis such as debtors (account receivable). Some of the basic and important terms used in stock markets. plant. 50.

dividends. purchases goods for Rs. These are called 'sales revenues'. From the accounting equation given earlier. For example.000 on credit for a month from Fast Foods Products Company on 25 December 2001. 10. It is equal to total assets minus total external liabilities: E=A-L this is also called residual interest. Sales may be cash sales or credit sales. it can easily be found that the capital is Rs. Both small and big businesses find it necessary to borrow money at some time or the other.These are the obligations or debts that the enterprise must pay in money or services at sometime in the future. royalties. bills payable (notes payable). for example. creditors (accounts payable). interest.40. commission. for example. Therefore. If the balance sheet of Departmental stores is prepared as at 31 December 2001. Sales Sales are total revenues from goods sold and/or services sold or provided to customers.  Long term liabilities are those that are usually payable after a period of one year. this will be shown as a liability in the balance sheet of the Departmental Stores. super bazaar. fees. rent received. Revenues These are the amounts the business earns by selling it products or providing services to customers. If the departmental store also takes a loan for a period of three years from ABC Bank Ltd. and to purchase goods on credit.  Short term liabilities are obligations that are payable within a period of one year. Owner’s equity is the ownership claim on total assets.. Capital Investment by the owners for the use in the firm is known as capital. Fast Food Products Company will be shown as creditors (accounts payable) on the liabilities side of the balance sheet. claims against assets of the firms. Other items and sources of revenues common to many businesses are: sales. Expenses . etc. a term loan from financial institution or debentures (bonds) issued by the company. Owner's equity is equal to capital.000. cash credit overdraft from a bank for a short period. represent creditors.

a firm spends Rs. Income Income is the increase in the net worth of the organization either from business activity or other activities.000. its benefit is to be derived in future. Expenditure Expenditure is the amount of resources consumed. Gains Gain is the change in the equity (net worth) arising from change in the form and place of goods and holding of assets over a period of time whether realized or unrealized. Profit Profit is the excess of revenues over expenses during an accounting year.These are costs incurred by a business in the process of earning revenues. there is a loss of Rs. costs of heat. It is the excess of expenses over revenues. It may either be of capital nature or revenue nature or both. salary. light and water. Usually. etc. 70. interest. Drawings . It increases the owner’s equity. It represents reduction in owners' equity due to inability of the firm to recover the assets used in the business. For example. Loss Loss is the gross decreases in the assets or gross increases in the liabilities. rent.000 which represents non-recovery of assets consumed in doing business. Therefore.000 and generates revenue of Rs. In accounting income is the positive change in the wealth of the firm over a period of time. For example: capital expenditure. Income is a comprehensive term. wages. 60. Generally. telephone. expenses are measured by the cost of assets consumed or services used during an accounting period. The usual items of expenses are: depreciation. 10. it is of long term in nature. which includes profit also.

In a manufacturing company. Debtors/Accounts Receivable Debtors (accounts receivable) are persons and/or other entities who owe to an enterprise an amount for receiving goods and services on the credit. Creditors/Accounts Payable Creditors (accounts payable) are persons and/or other entities who have to be paid by an enterprise an amount for providing the enterprise goods and/ or services on credit. Purchases Purchases are total amounts of goods procured by a business on credit and for cash. semi-finished goods and finished goods on hand on the closing date. In a trading concern. In a manufacturing concern. processed further into finished goods and then sold. opening stock (beginning inventory) is the amount of stock at the beginning of the accounting year. In a trading concern.It is the amount of cash or other assets withdrawn by the owner for his personal use. It is called stock on hand. . raw materials are purchased. for use or sale. Stock Stock (inventory) is a measure of something on hand-goods. Purchases may be cash purchases or credit purchases. spares and other items-in a business. Similarly. The total amount due from such persons and/or entities on the closing date is shown in the balance sheet as the sundry debtors (account receivables) on the asset side. closing stock comprises raw materials. the stock on hand is the amount of goods which have not been sold on the date on which the balance sheet is prepared. purchases are made of merchandise for resale with or without processing. This is also called closing stock (ending inventory). The total amount standing due to such persons and/or entities on the closing date is shown on the balance sheet as sundry creditors (accounts payable) on the liability side.

a list of expenses that have been incurred and expensed. liabilities.e.money owed to a business.summary of a company's financial status. measuring. to be amortized over a period of time. which amounts will be compared to actual income and expense for analysis of variances Capital Stock – found in the equity portion of the balance sheet describing the number of shares sold to shareholders at a predetermined value per share.Accounting .a method in which income is recorded when it is earned and expenses are recorded when they are incurred. all independent of cash flow Accruals . by whom and where. etc. used by auditors when validating the financial statement Auditors – third party accountants who review an entity’s financial statements for accuracy and provide a statement to that effect Balance Sheet . but not paid or a list of sales that have been completed. including assets. either assets or liabilities Asset . vendors. the development cost of a new product Chart of Accounts . also called “common stock” or “preferred stock” Capital Surplus – found in the equity portion of the balance sheet accounting for the amount shareholders paid that is greater or lesser than the “capital stock” amount Capitalized Expense – expenses that are accumulated.recording financial information Budgeting – the process of assigning forecasted income and expenses to accounts. credit sales Accrual Accounting . and equity Bookkeeping . when it was done.assets = liabilities + equity Accounts Payable .a listing of a company's accounts and their corresponding numbers Cash-Basis Accounting .money owed to creditors. not expensed as incurred.a method in which income and expenses are recorded when they are paid.property with a cash value that is owned by a business or individual Audit Trail – a record of every transaction. . i.e. but not yet billed Amortization – gradual reduction of amounts in an account over time. and reporting financial information of an entity Accounting Equation .process of identifying. i. Accounts Receivable .

and positive value for liabilities and equity.a record containing the balance sheet and the income statement .money owed to the owner or owners of a company. and net profit by entity Depreciation . defining.a summary of cash received and disbursed showing the beginning and ending amounts Closing the Books/Year End Closing – the process of reversing the income and expense for a fiscal or calendar year and netting the amount into “retained earnings” Cost Accounting .accounting focused on reporting an entity's activities to an external party.Cash Flow .system of accounting in which every transaction has a corresponding positive and negative entry (debits and credits) Equity . also known as "owner's equity" Financial Accounting . and reporting costs associated with specific operating functions Credit . and negative value for liabilities and equity.an account entry with a positive value for assets. expenses. showing individual income.recognizing the decrease in the value of an asset due to age and use Dividends – amounts paid to shareholders out of current or retained earnings Double-Entry Bookkeeping .an account entry with a negative value for assets. ie: shareholders Financial Statement .a type of accounting that focuses on recording. Departmental Accounting – separating operating divisions into their own sub entities on the income statement. Debit .

first out.” first in.recognizing the decrease in the value of an asset. first out. “average.a written agreement to repay borrowed money. ie: sale of an old building Note . sometimes used in place of "loan" Operating Income . building.a record where transactions are recorded. “LIFO. depreciation and amortization Non-operating Income .money borrowed from a lender and usually repaid with interest Master Account – an account on the general ledger that subtotals the “subsidiary accounts” assigned to it. “standard. outlining what was purchased and the terms of sale. also known as an "account" Liability .a record of all financial transactions within an entity Goodwill – an intangible asset reflecting the value of an entity in excess of its tangible assets Income Statement . General Ledger . etc.” a “deemed” amount related to but not tied to a specific purchase. computers. etc Liquid Asset . etc.system of tracking costs associated with a job or project (labor. “last cost. etc) and comparing with forecasted costs Journal .money owed to creditors.long-term tangible property.” the cost based on the last purchase. equipment. i.e. vendors. Cash might be the master account for a list of depository accounts at banks Net Income . payment.income generated from regular business operations .” based on a uniquely identifiable serial number or character of each inventory item Invoice – the original billing from the seller to the buyer. i.” last in.Fixed Asset . land. Job Costing .” an average cost over a given period.cash or other property that can be easily converted to cash Loan .money remaining after all expenses and taxes have been paid Non Cash Expense .e. “FIFO.income generated from non-recurring transactions.a summary of income and expenses Inventory – merchandise purchased for resale at a profit Inventory Valuation – the method to set the book value of unsold inventory: i.e. “serialized.

“Cash-ABC Bank” might be one of several subsidiary accounts that are subtotaled under “Cash” Supplies – assets purchased to be consumed by the entity Treasury Stock – shares purchased by the entity from shareholders. rents.e.a list of employees and their wages Posting – the process of entering then permanently saving or “archiving” accounting data Profit . i. Payroll .” i. the bank statement to the check register. i. Shareholder Equity . Subsidiary Accounts – the subaccounts that are totaled on the financial statement under “master accounts.e.e.system of accounting in which transactions are entered into one account Statement of Account .see "income statement" Reconciliation – the process of matching one set of data to another. Retained Earnings – the amount of net profit retained and not paid out to shareholders over the life of the business Revenue . the accounts payable journal to the general ledger. etc. reducing shareholder equity Write-down/Write-off – an accounting entry that reduces the value of an asset due to an impairment of that asset.total income before expenses. etc. the account receivable from the bankrupt customer .Other Income . i.income generated from other than regular business operations.e.a summary of amounts owed to a vendor. etc.the capital and retained earnings in an entity attributed to the shareholders Single-Entry Bookkeeping . interest.see "net income" Profit/Loss Statement . lender.