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Ahsan ul Haq

Accounting Terminologies and Definitions

1. Barter System:Dealing of "goods against goods" is called the Barter System.
2. Single Entry System:This was the very initial system in which the record of give and take was written in unmaintained way.
3. Double Entry System:Every transaction of the business is either debit or credit. It is written in proper way of accounting.
4. Transaction:Any dealing between two persons or things is called transaction.
5. Business:Any legal activity undertaken for the purpose of earning profit.
6. Proprietor:He is the owner of the business.
7. Capital:Any cash or asset which commence the business is called Capital.
8. Drawings:Any cash or good which is taken away by the proprietor for his personal use is called drawings.
9. Purchases:Goods bought for the business for the reselling purpose is called purchases.
10. Purchases Returns:Some times, Goods bought are defected goods and are returned to the seller is called Purchases Returns.
11. Sales:Goods sold to any customer of the business is called sales.
12. Sales Returns:Some times the goods sold to the business customers are defected and are returned back to the proprietor
of such business are called sales returns.
13. Trade Discount:Trade discount is granted in the following circumstances;
a. If goods are sold to a fellow trader.
b. If the buyer/ customer is an old customer.
c. If sales are made in huge amount or in bulk.
d. If there is a custom of trade in the market.


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14. Cash Discount:When a Customer pays his debts to the proprietor, he allow a discount is called cash discount.
15. Commission:The remuneration of any service rendered by any one is called commission.
16. Expenditure:When any asset is bought or any service is required, the expenditure is paid.
17. Expense:There are two types of expenses, a) Direct & b) Indirect. Direct expense is payable immediately and is
suffered immediately while the indirect expense is payable after a specified period is passed.
18. Account:A summarised record of business transactions is called an account.
19. Debtor (Account Receivable):A person who buy goods from us on credit is our debtor.
20. Creditor (Account Payable):If we buy goods on credit from any person, whole saler or factory, they are our creditors.
21. Assets:Things of value possessed by a trader are called assets.
22. Liabilities:Debts due by the business to its proprietor.
23. Voucher:Any written evidence of transaction is called the voucher.
24. Goods (Merchandise):All the goods which are bought for selling purpose in business is called the merchandise.
25. Stock (Inventory):Goods in hand is called stock.
26. Equity:The rights to properties are called equities. These are capital and liabilities.

Accounting Cycle
It include the whole accounting procedure in which the accounting entries are recorded in a standard way in
any book of account. As mentioned in the following figure, we see the first phase of business is a transaction
and it ends till the balance sheet is completed.


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Balance Sheet


Final Accounts


Trial Balance

Figure no. 1 Accounting Cycle

Nature of Accounts
In accounting there are two basic natures of accounts.
1) Personal Account
2) Impersonal Account
Personal account deals with a person/ persons, firms, companies names, any debtor or creditor and
capital. While Impersonal accounts have further two kinds.
1) Real account
2) Nominal account
1) Real Account:It is called the material account such as cash account, Building Account, Machinaery Account etc.
2) Nominal Account:These accounts are related to profits/ losses or incomes/ expenditures such as rent account, electricity
expenses, salaries etc.
Rules of Debit and Credit
Now, when we are familiar to the nature of accounts, so we can easily go on with the rules of debit and
credit. The following chart can easily explain about which account to be consider debit in future journal
entry and which to be considered as credit.


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Personal Account



Real Account

Comes in

Goes out

Nominal Account

Any Loss/Expense

Any Profit/Gain

Let us evaluate
Now, we have come to know about the rules of debit and credit the accounts, so let us evaluate these
accounts with the help of different examples. Let us look at the following transactions;
Example No.1
Mian Yawar Hussain decided to start a business on 1rst January 2015. Following are his transactions during
the month of January, 2015.
Jan. 1

Commenced business with cash.

Rs. 10,000


Bought goods for cash.

Rs. 300


Bought furniture for cash.

Rs. 2,000


Sold Goods to Ahsan.

Rs. 1,000


Purchased goods from Ghazal & Co.

Rs. 300


Sold goods for cash.

Rs. 150


Received from Ahsan cash.

Rs. 900

Allowed him Discount

Rs. 100


Paid salary to clerk.

Rs. 50


Paid Ghazal & Co. cash.

Rs. 290

Received discount.

Rs. 10


Bought weighing scale and iron safe for cash.

Rs. 185


Paid general expenses for the month.

Rs. 50


Paid rent.

Rs. 100


Paid salaries.

Rs. 500


Paid Trade expenses.

Rs. 300