ACCOUNTING TERMINOLOGY

INDEX

Sr. No. TOPIC PAGE No.

1. EXECUTIVE SUMMARY 3

2. INTRODUCTION 4-9

3. BASIC TERMS OF ACCOUNTING 10-16

4. CASE STUDY 17-18

5. CONCLUSION 18

6. BIBLIOGRAPHY 19
EXECUTIVE SUMMARY:

The necessity for uniformity of terminology has been one of the basic problems faced by the
accounting professionals. The awareness of the need for a uniform terminology has been
intensified in recent times, considering that the mistakes which may flow from the wrong
usages are being taken in account earnestly. Standards should be put up and achieved so that
every human being can brilliantly understand or construe the accounting records and summary.
This uniformity needs to be accomplished for the products of accounts to be appreciated and
respected.

PURPOSE OF THIS PROJECT:

It is the purpose of this research to define the basic terms of accounting used by many
accounting professionals and students. The objective is to reduce misunderstanding and
confusion. Many varied outlooks exist about the field of accounting because of the absence of
uniformity in terminology.

The terminology of accounting is a bit unclear and indefinite. Confusions are innumerable
because of uncertainty used in explaining or defining numerous assets, liabilities, and capital
and the explanations usually misstate genuine facts concerning a business.

Many varied opinions exist concerning the general field of accounting and statements presented
by people because of the lack of uniformity in terminology. Even though the accounting
professionals must frame their own judgements and initiatives, a foundation of standardized
accounting terminology should be thoroughly set.

It has become evident that financial statements should be systematically interpreted before they
can appropriately show the conditions of the institutions they represent.

In this project, all the basic definitions that are widely acceptable are discussed along with the
basic introduction to accounting, primary and secondary characteristics of accounting, its
purpose and role in business. The definitions have been put together for the motive of
establishing standardization in the interpretations and presentation of accounting terms and
statements.
INTRODUCTION:

ACCOUNTING

Business institutions and other organizations carry on activities that involve money exchanging
or exchange of economic resources. Where the number of these activities is huge, these
activities must be recorded for the motive of taking required decisions as to whether these
activities are feasible, applicable, profitable or they should be discontinued because of their
impracticality. Details about the business and other entities are required not only for the
managers but also for many other interested people such as government officials, customers,
researchers and employees.

Lifting and utilizing finance for some motives must be recorded systematically, scientifically
and uniformly. It should be noted that finance is an essential resource next to the human
resource for any economic activity. Therefore, there is a requirement for principal methods and
procedures which must be followed to account for the financial activities taking place in an
institution. Accounting the financial activities in an organized way aids in discovering the
efficiency of performance of the activities performed and also provides information about the
affairs of the institution for further planning and analysis.

Business speaks through accounting. The major role of a language is to ease communication.
The data about business organizations regarding their performance and status can be interpreted
through the financial information recorded in accounting records. This data is communicated
to the users who show interest. These users may include proprietors, managers, investors,
customers and government officials.

MEANING OF ACCOUNTING

Accounting is the activity which summarizes, analyses, and reports information which
discusses financial transactions. It is a process of identifying, measuring, recording, classifying,
summarising, interpreting and communicating financial data.

It provides us with data on the resources available, how the resources have been used, and the
outcome after the resources have been used. It summarises an institution’s financial position
and aggregated reports based on many financial transactions. The profit and loss during the
accounting period, assets, liabilities and capital can be discovered from the data recorded in
accounting. This branch of study has come out to encounter the necessity of financial data
required by various interested groups and organizations.

It is sometimes referred to as a “storehouse” of data. It is an art which needs the ability to plan
accounting system and policies which determines the accounting process to match the essential
requirement of an institute. It helps in translating the performance of an organization into data
that can be compared. There are four basic components of accounting and these are:

• Recording
• Summarising
• Reporting
• Analysing

RECORDING:

The first and main purpose that accounting strives to achieve is the recording of various
transactions that are made within an institution. This can also be termed as bookkeeping (the
process of acknowledging the transactions and putting them up in a record). Book Keeping is
responsible only for recording a segment. The continuity of the procedure helps systematically.

The three ways of recording are:

• Making a system which will aid in maintaining the record

• Trailing financial transactions
• Compiling the reports to show a final set of financial reports

SUMMARISING:

Raw information is normally the outcome of recording financial transactions. But this raw
information is of no use to the organisations or institutions. They have no role to play in making
the decisions. As a result, accounting professionals separate the raw information into various
categories. So, the process of recording financial transactions is followed by summarising.

REPORTING:

The outcomes in any entity or institution are the responsibility of the managers. The owners of
the firm must know about the operations going on in their firms using their money. To handle
this, the management has to provide them with the reports. They receive a quarterly report and
an annual report. The annual report summarizes all the operations taken up by the firm in a
year using the money, and also gives the owner a brief idea about the performance.

ANALYSING:

All the reports which are submitted to the owners are analysed. The essential part after
recording and summarising is to conclude. The burden lies on the management to look into the
positive and negative sides. Hence, for the analysis of results, accounting brings in the concept
of comparison of profits, sales and equity which determine the growth of an institution.

FUNDAMENTALS OF ACCOUNTING

ALOE is an acronym which plays a major role in the world of accounts as well as in
understanding the meaning of this subject better. ALOE means:

• A- Assets
• L- Liabilities
• O- Ownership
• E- Equity

Assets = Liabilities + Ownership’s Equity

• Assets- Things that belong to a person and the person is the owner of them. These things
correlate to a price that can provide him with cash in exchange for them. Examples of
assets can be a house, a mobile phone, a car, etc.
• Liabilities- Anything you owe to someone is a liability. For example, a bank loan is
counted as a liability.
• Owner’s Equity- Total amount of capital that someone invests in an organization is
referred to as owner’s equity. The investment not necessarily cashes all the time.

CHARACTERISTICS OF ACCOUNTING

Characteristics of accounts are broadly classified into:

• Primary characteristics
• Secondary characteristics
PRIMARY CHARACTERISTICS

• Relevance: Relevance in accounting is connected to the concept of beneficial data. The

data should be able to make a difference in the decisions made by users. The data which
was collected by accountant professionals can be relevant for one thing which
necessarily will not be relevant for other things.
• Reliability: Reliable data is needed to make decisions about the financial status of a
business entity. Reliability differs. There are a few factors which affect the reliability
of data such as accounting measurement and uncertainties.

SECONDARY CHARACTERISTICs

• Comparability: There are two types of comparisons, intra-firm comparison and inter-
firm comparison. In intra-firm comparison, the user compares the data of one period
with that of other periods in an organization. In inter-firm comparison, the users
compare the accounting data of their organizations with that of other organizations.
• Understandability: The data provided through financial statements must be laid down
in such a manner that the users are able to comprehend it.

OBJECTIVES OF ACCOUNTING

• To maintain a standardized or systematic record of all the financial transactions and

events
• To discover the profit and loss of a business organization and also to give a clear idea
about the failures of the measures adopted.
• To discover the financial status of the organization
• To give data to different colleagues as per their requirement
• To provide a record of the utility of resources
• Aids them in decision making
• Helps a lot to any organization in keeping a check on activities, and that is useful in
preventing frauds.
• To assess employees and their efficiency and to spread accounting data to the interested
users.
FUNCTIONS OF ACCOUNTING

• Measurement: To keep a systemizes record of all the financial transactions and prepare
final accounts. It functions as a measuring tool for calculating the performance of a
business entity and it expresses the financial status of the business entity.
• Forecasting: Because of many different accounting tools, the future performances and
the future financial status of a business entity can be predicted or foreseen.
• Comparison: Accounting aids to compare the real performance or results with the
performance or results which were expected or with accounting policies of the
organization. Through comparison of the real performances with the expected one, the
organization can set targets to increase their efficiency and make their performance
better.
• Decision making: Accounting provides the organization with valid data and
information which gives the leaders a brief idea about their performances and
comparisons which took place. Due to this, the leaders can strive to choose a better
course of actions for their workers to enhance efficiency.
• Control: Accounting works as a tool for measuring the strengths and weaknesses of an
organization. It provides an insight into various techniques and programmes endorsed
in it. Control refers to comparing the real performance with expected performance and
taking measures to correct the actions.
• Assistant to government: Accounting provides appropriate data to the government
regarding different business entities which help the government to keep a track of them.
It also aids the government regarding taxation, the grant of subsidies, etc.

IMPORTANCE OF ACCOUNTING

SYSTEMATIC RECORDS

All the financial transactions of an organization or business are recorded in an organized way
in the books of accounts. The records, data and information regarding the transactions are
classified by the management of the organization and then their summaries are prepared.
PREPARATION OF FINANCIAL STATEMENTS

Outcomes of operations and financial status of a business can be discovered through the
periodically prepared financial statements, profit and loss and balance sheet. This is going to
aid in the dispersion of profits to the owners and produce capital for the ideal growth of the
business.

ASSESSMENT OF PROGRESS

To identify the areas of weakness and progress made in a different field, analysis and
assessment of financial information are done. A complete idea of cash flows, profits and capital
structure of a business organization is presented to the management.

AID TO DECISION MAKING

Future plans and strategies can be organized by the management which is dependent on the
accounting information provided. Management of an organization is responsible for creating a
schedule and creative decisions. Accounting provides appropriate data.

INFORMATION TO INTERESTED GROUPS

Accounts provides applicable and sufficient information to various interested groups such as
scholars, government officials, employees, tax authorities, owners, managers, etc.

BASIC ACCOUNTING TERMS

Accounting is a flexible or an adaptable system which has a large number of roles and purposes,
especially in business organizations. The basic accounting terms mentioned below need to be
understood well by everyone.

ACCOUNT:

• It can be termed as a record of any type of financial transaction. For examples, salaries,
electricity expense, etc.
• It can also be known as a digest of all the transactions happening in an organization.
 • It shows the number of transactions and their effects as well.
• An account is opened by a person for assets, expenses, income etc.

BUSINESS TRANSACTION:

• The term business transaction means an economic activity or a financial transaction

entered by few parties which gives rise to the process of recording it in the books of
accounts of the organization.
• It is a financial affair which is conveyed in terms of money which initiates a change
in the financial condition of an organization.
• It can also be explained as an agreement between two or more people (also known as
parties) which demands the exchange of goods and services.
• Transaction is of two types, cash and credit.
• Cash transactions: When the amount is transacted, i.e., paid or received immediately
after entering into a financial transaction or an economic activity, it is known as cash
transaction.
• Credit transaction: When the party promises to pay the amount later, it is known as a
credit transaction.
• Transactions can be external or internal.
• External transaction: When the goods and services are exchanged between a business
entity or a second party, it is said to be an external transaction.
• Internal transaction: when there is no second party involved. Example, money spent
for paying an employee for services provided, or money spent on machinery.

LIABILITY

• It is defined as the financial responsibility of a business.

• It means the amount that a business owes or has to pay.
• Can be classified as internal and external liabilities.
• Liabilities towards the owner are known as internal liabilities, while the liabilities owed
to the outsiders (anyone except owners or partners) are known as external liabilities.
• External liabilities arise when the credit transactions are made or when are loans are
taken.
• Liabilities can be further divided into, non-current liabilities and current liabilities.
 • Non-current Liability: A liability which can be paid after a phase of more than a year
after the accounting activity is done. Example, long term loans.
• Current Liability: A liability which is supposed to be paid within 12 months from the
end of accounting period. Example, bills and short-term loans.

ASSETS

• Anything which has a monetary value is termed as an asset. It is a property owned by

an organization, and it can be converted into cash.
• Anything which allows or enables a business to experience an economic profit in
coming years is known as an asset. Example, machinery, land, a building, etc.
• Assets can be classified into, non-current assets, current assets and fictitious assets.
• Non-current Assets: Assets which are not meant to be resold. These assets are held by
an organization as an investment or to ease the functions of the business. These are
further classified into tangible and intangible assets.
• Tangible assets: Assets which are physically present and which can be seen or
touched. Example, land, a building, etc.
• Intangible assets: Assets which are physically absent and which cannot be seen or
touched. Example, computer software, trademarks, etc.
• Current assets: Assets which are meant to be converted to cash by an organization
within a short period of time, i.e., one year. Example, goods purchase to resell and
earn profit.
• Fictitious assets: Assets which are neither tangible nor intangible assets.

GAIN

• It can be explained as the escalation in the owner’s possession of assets (equity)

emerging from something different than the day to day earning, which is irregular in
nature.
• It can also be defined as any economic advantage which occurs differently from the
normal course of a business.

LOSS

• It can be defined as an increase in expense of a business. It lessens the owner’s

possession of assets (equity).
 • This situation occurs when the worth of the money is lost and the organization or the
firm receives nothing in return.
• Example, stolen goods or money.

PROFIT

• It means the money earned by an organization through the activities followed through
by the organization to make profit. It is further divided into, gross profit and net profit.
• Gross Profit: It is the difference of goods sold or services rendered and their direct cost.
• Net Profit: It is the profit obtained after the subtraction of total expense from total
revenue of an organization. If the expense is more than revenue, it is called Net Loss.

CAPITAL

• It is said to be the amount funded or invested in an organization by the partners in a

partnership business.
• The funds are in the form of money or things (assets) which have a monetary value.
• When it comes to companies, the people who’ve contributed the capital are known as
stakeholders.
• It is a liability owed to the partners in business and it escalates when more investments
are made in the business and profit is earned.
• The liability decreases when the investments are withdrawn or the business faces loss.

DRAWINGS

• Amount of cash, goods or assets withdrawn or taken back by the partners or owners for
their personal utilization.
• Drawings decrease the investment or capital of the owners or partners.
• They are debited to the drawing account.

RECEIPT

• It is the amount that has to be obtained after selling assets, goods or services.
• They are of two types, revenue receipts and capital receipts.
 • Revenue Receipt: It can be explained as the amount that has to be obtained against the
sale of goods or providing services or investments made in business in fixed deposits.
Example, interest obtained on fixed deposits or investments, amount received after
rendering services or selling goods, etc.
• Capital Receipt: It is the amount that is obtained after indulging in transactions that are
not revenue in nature. Example, sale of a building, machinery, furniture, investment,
loan taken, etc.

EXPENDITURE

• Expenditure is the amount exhausted for receiving assets, goods or services. It can be
differentiated into, capital expenditure, revenue expenditure and deferred revenue
expenditure.
• Capital Expenditure: Can be explained as the liabilities suffered to obtain assets, goods
or services, or enhancing the existing ones so that they can escalate the earning or
profits of an organization. It can be sustained to obtain tangible or intangible assets.
Example, purchasing furniture or machinery to carry on business in a better way.
• Revenue Expenditure: It is the expenditure sustained to exhaust the benefits of the
assets acquired under an accounting period. It is directly connected with the revenue
or accounting period, i.e., the cost of the goods sold, electricity expenses, etc.
• Deferred Revenue Expenditure: It is a revenue expenditure but the advantage of such
expenditure flow in more than one financial year. Example, advertising expenditure
whose advantage will flow for more than one financial year.

REVENUE

• Revenue is the cash going into a business, receivables or other elements which
emerge from the sale of goods, rendering service, use of organizational resources
yielding interest by others, etc.
• It can be explained as the amount that is to be obtained by the organization from its
activities.
• Example, receipts from the sale of goods, rent, commission, etc.
EXPENSE

• It can be defined as the cost suffered to initiate revenue. It is a utility that has come to
an end during the accounting period.
• It can be a payment. Example, rent, salary, wages, etc., or a decrease in the worth of
assets.

INCOME

• It can be defined as the profit obtained during an accounting period. The difference in
revenue and expense is known as income.
• Income = Revenue – Expense.

PURCHASES

• The term Purchases is used for an account which is supposed to record all the goods
and raw material that are bought or purchased for the purpose of resale or conversion
into finished goods which are supposed to be sold.
• Purchases include both cash and credit purchases. Purchases made on cash are known
as cash purchases and purchases made on credit are called credit purchases.
• Purchases Return: If the purchased goods are defected, they are returned back to the
sellers. This is known as purchases return or Returns Outwards.

STOCK / INVENTORY:

• Stock can be defined as a tangible asset which are held by an organization for the
purpose of resale or investing in the production of goods meant for sale. Stock can be,
opening and closing stock or inventory.
• Opening Stock (Inventory): It is the stock which is present at the beginning of each
accounting year, or in the end of the previous accounting year.
• Closing Stock (Inventory): It is the stock present at the end of the present accounting
period.
• Stock (inventory) can be divided into a few types. Stock or Inventory of Goods, Stock
or Inventory of Raw Materials, Work-in-Progress.
 • Stock or Inventory of Goods: It includes processed goods which are manufactured for
the purpose of sale. The goods are valued at cost or net realisable value.
• Stock or Inventory of Raw Materials: It includes the stock of raw materials which are
used for the manufacturing of products lying unused. Example, a piece of cloth which
will be used to make dresses in future.
• Work-in-Progress: It comprises of the stock which is in the process of being finished
or is partly finished. It is valued at a total cost of raw material used, cost of paying
wages to the labours, other production costs, i.e., electricity, fuel for machines, etc.

TRADE RECEIVABLES

• It is the amount that is to be obtained for the sale of goods and services rendered by a
business. It is the amount that has to be paid by the customer. It is an aggregate of
debtors and bill receivable.
• It can also be explained as the amount obtained by an organization for the goods and
services rendered.
• Debtor: Person or any entity that is bound to pay some amount to the enterprise or an
organization for the sales of goods and services by the organization. When the goods
are sold to a person on credit, the person is known as debtor because he owes the amount
to the organization.
• Bill Receivables: It means a Bill of Exchange that is received by the debtor, the amount
of which will be obtained on a certain date.

TRADE PAYABLES

• It is the amount that is to be paid for the purchase of goods. It is the amount that is
expected from a debtor by the seller of the goods and services. It is an aggregate of
creditors and bill payables.
• Creditor: It can be defined as a person or an organization, to whom the debtor owes
amount in exchange of the goods and services rendered.
• Bill Payables: It is the Bill of Exchange that is received by the person or organization,
the amount of which will be payable on a certain date.
DISCOUNT

• It is the decrease in the cost of goods or in the amount that has to be paid to the
organization. Discount is of two types, Trade Discount or Cash Discount.
• Trade Discount: It is the decrease in the price prices by the seller to the buyer when
they buy things of specific quantity or value.
• Cash Discount: It is the discount permitted for well-timed payment of expected
amount. It is recorded in the books of account for both the parties.

BALANCE SHEET

• It is a statement of the financial status of an individual or organization at a certain date,

that shows its assets, liabilities, capital, reserves and other account balances at their
respective book values.
• And Books of Account mean the records or books in which financial transactions of
an individual or an organization are recorded and conserved. They comprise of Cash
Book, Bank Book, Journal and Ledger.

ENTITY

• It means an economic unit which carries out economic activity. Example, Reliance
Industries, Bajaj Auto, Maruti, TISCO. It means an enterprise settled in obedience with
law to go in for business activities.

CASE STUDY

Mr. Tyagi established a business of purchasing and selling readymade garments with Rs.
10,00,000 as the initial investment out of which he paid 2,00,000 for renovation and buying
furniture, Rs. 3,00,000 for buying garments that are supposed to be resold. He employed two
salesman and one clerk. At the end of the year, he used to pay them Rs. 25,000. From the
clothes bought he resold some clothes for Rs. 2,50,000 for cash and balance to Mr. Pandit on
credit for Rs. 1,00,000.

In the next month, due to an earthquake, his furniture worth Rs. 45,000 was damaged. He sold
his car for worth Rs. 3, 00,000 for Rs. 3,05,000. During the next month he purchased some
more garments from Mr. Tripathi for Rs. 55,000 and they are still unsold.
Questions based on the case study.

What is the capital with which Mr. Tyagi started the business?

A. Rs. 10,00,000

What fixed assets did he buy?

A. Furniture

What is the value of goods purchased?

A. Cash Purchases = Rs. 3,00,000

Credit Purchases = Rs. 55,000

Who is the creditor? Also state the amount payable.

A. Mr. Tripathi, Rs. 55,000

What are the expenses?

A. Rs. 25,000, salaries given to the sales men and the clerk.

What is the profit earned or loss suffered from the sales of goods?

A. Total Sales = Cash Sales + Credit Sales

2,50,000 + 1,00,000 = Rs. 3,50,000
Total Cost = Cost of Material + Expenses
3,00,000 + 25,000 = Rs. 3,25,000
Profit = Sales – Cost
Profit = 3,50,000 – 3,25,000 = 25,000

What is the gain he earned?

A. Gain = Save Value – Cost Value

Rs. 5,000 = 30,5000 – 3,00,000

What is the loss he incurred?

A. Rs. 45,000 due to the earthquake.

Who is the debtor? What is the amount receivable?

A. Mr. Pandit, Rs. 1,00,000

What is the value of closing stock?

 A. Closing Stock = Rs. 55,000

How much is the cash left with Mr. Tyagi?

RECEIPTS PAYMENTS

CASH THROUGH CAPITAL PAYMENT FOR FURNITURE AND

RENOVATION
10,00,000
2,00,000

CASH RECEIVED FROM SALES GARMENTS

2,50,000 3,00,000

FOR SELLING THE CAR SALARIES CAR

3,05,000 25,000 3,00,000

TOTAL RECEIPTS TOTAL PAYMENTS

15,55,000 8, 25,000

Net Cash Balance = Total Receipts – Total Payments = 15,55,000 – 8,25,000 = 5,30,000

CONCLUSIONS

I would like to conclude this assignment by highlighting the purpose of this project. Through
this project, the issues regarding the systemization and uniformity of the accounting
terminology throughout the world have been mentioned. If the systemization of the
terminologies is there, there would be no difficulty in comprehension of the meanings by
different people who use accounts in their daily lives.

BIBLIOGRAPHY

• Double Entry Book Keeping, Financial Accounting, By T.S. Grewal

• A thesis presented to the Faculty of Department of Commerce, Indiana State Teachers
College.
http://scholars.indstate.edu/xmlui/bitstream/handle/10484/4883/isua-thesis-1949-
nagy.pdf?sequence=2
• Financial accounting: an introduction to concepts, methods and uses.
https://books.google.com/books?hl=en&lr=&id=fYsWAAAAQBAJ&oi=fnd&pg=P
R5&dq=accounting+terminology+thesis&ots=b3D5STMOJq&sig=liCc4SmBsG8IN
z3oUdFcEeBHpFU
• Basics of Accounting and Information Processing, Larry M. Walther
https://books.google.co.in/books?hl=en&lr=&id=e8QrjO3g9FcC&oi=fnd&pg=PA13
&dq=basics+of+accounting&ots=dS2W71bJFF&sig=w4Jz9hOjH9_wurEUq9oW1C
xtoZI
• Department of School Education: Government of Tamil Nadu
http://ndl.iitkgp.ac.in/document/Z2RWUHoyS0JXTUdZczNJeE9zVU9ON2ZLaDhQ
emlBbDl2T0JWaWRma3BZcz0