Basic Accounting Terminology

1. Transaction: It is transfer of money or goods or service from

one person or account to another person or account.
2. Cash transactions: cash is paid or received immediately.
3. Credit transactions: is one where there is a promise to
pay/receive cash at a future date. assets etc.),
4. Capital: Funds brought in to start business, by the owner/s. In
the case of a company, capital is collected by issue of shares.
5. Share: A share in a company is one of the units into which the
total capital of the company is divided.
6. Assets: An asset is a resource legally owned by the
enterprise as a result of past events and from which future
economic benefits are expected to flow to the enterprise. Eg:
Land and buildings, plant and machinery, furniture and
fixtures, cash in hand and at bank, debtors and stock etc., are
regarded as assets.
Assets are classified based on the purpose for which an asset
is held in the hands of the user. Assets may be fixed, current,
liquid or fictitious.
7.

Fixed assets are those which are held for use in the
production or supply of goods and services and not for resale
in the normal course of business. Eg. Land, Plant and
Machinery are fixed assets. The exception to it is, for a land

developer, land is considered as current asset because he is

involved in buying and selling of land.
8. Current assets are those which are held or receivable within
a year or within the operating cycle of the business. They are
intended to be converted into cash within a short period of
time. Ex: Stock in trade, debtors, bills receivable, cash at
bank etc.
9. Liquid assets are those which can be easily converted into
cash and for instance, cash in hand, cash at bank, marketable
investments etc.
10. Fictitious assets are in the form of such expenses which
could not be written off during the period of their incidence. For
example, promotional expenses of a company which could not
be treated as expenditure in the year of incidence are shown
as fictitious assets.
11. Liability: It is a financial obligation of an enterprise arising
from past event the settlement of which is expected to result in
an outflow of resources embodying economic benefit. Eg.
Loans payable, salaries payable, term loans.
12. Current liability is that obligation which has to be satisfied
within a year. For example, payment to be made to sundry
creditors for the goods supplied by them on credit; bills

payable accepted by the businessman; overdraft raised by the

businessman in a bank etc.
13. Equity: Equity is the residual interest in the asset of the
enterprise after deducting all its liabilities. The equity of a
company is called shareholders equity. Its components
include share capital, share premium and retained earnings.
14. Partnership: It is a relationship between partners to contribute
capital to start business, agree to distribute profits and losses
in an agreed proportion. It is a business being carried on by all
or any one acting for all. Partnership firm refers to business
whereas the partnership refers to relationship caused by
agreement.
15. Joint Stock Company: It is an organization, for which the
capital is contributed by shareholders to carry on business and
it is registered under Companies Act and it has a legal entity,
having perpetual existence and a common seal.
16. Goods: Goods refer to merchandise, commodities, products,
articles or things in which a trader deals. It represents
commodities or things meant for resale. Goods account is
divided into six heads viz: purchases account, sales account,
purchases returns account, sales returns account, opening
stock account and closing stock account. Let us get the
meaning of each one.

 Purchases: Goods purchased by a business are called

purchases.
Sales: Goods sold by a business are called sales.
Purchases Return or Returns Outward: Goods returned
by a business to its suppliers out of the purchases already
made from them are called purchase returns.
Sales Returns or Returns Inward: Goods returned to a
business by its customers out of the sales already made
to them are called Sales Returns.
Opening Stock: Unsold goods lying in a business at the
beginning of a year, are called opening stock.
Closing Stock: Unsold goods lying in a business at the
end of a year, are called closing stock.
17. Inventory: Inventory refers to goods held by a business for
sale in the ordinary course of business or for consumption in
the production of goods or service for sale. It includes stock of
raw materials, stock of work in progress and stock of
finished goods.
18. Drawings: It refers to cash, goods or any other asset
withdrawn by the proprietor from his business for his personal
or domestic use. In short, amounts the owner withdraws from
his business for living and personal expenses.
19. Debtor: A debtor is a person who owes money to the
business. A debtor may be of 4 types.

 Trade debtor is a person who owes money to the

business for the goods supplied to him on credit.
A loan debtor is a person who owes money to the
business for the loan advanced to him.
Debtor for asset sold is a debtor who owes money to
the business for any asset sold to him on credit.
A debtor for service rendered is a debtor who owes
money to the business for the service rendered to him on
credit.
20. Debt: The amount due from a debtor to the business is called
a Debt, generally debt may be of three types:
Good debt refers to fully recoverable debt.
Bad debt refers to debt, which is not recoverable
(irrecoverable).
Doubtful debt refers to debt whose recovery is doubtful.
21. Creditors: A creditor is a person to whom the business owes
money. A creditor also may be of 4 types.
Trade creditor is a person to whom the business owes
money for goods purchased from him on credit.
Loan creditor is a person to whom the business owes
money for the loan borrowed from him.
Creditor for asset purchased is a creditor to whom the
business owes money for any asset purchased from him on
credit.
Expenses creditor refers to a creditor to whom the
business owes money for any service received from him on
credit. For e.g.: salaries unpaid, commission unpaid etc.

22. Debentures
Financial instruments issued by companies in the capital
market to raise debt.