Basic Accounting Terminology

1. Accountant: A person who is responsible for approving, recording and reviewing the
financial transactions of an organization. His work includes planning. Controlling and
monitoring transactions.
2. Accounting Estimates: These are the measures used in accountancy while preparing
financial statements because of inherent uncertainties involved in business events,
activities. These events or activities can’t be known accurately: hence these can only
be estimated. For example bad depts., useful life of fixed assets etc.
3. Accounting Policies: Accounting policies refer to the accounting principles which are
generally accepted and adopted by different enterprises and the methods of
applying those principles in the preparation and presentation of their finacnical
statements.
4. Acceptance: in simple words acceptance means giving assent or agreement by a
person on whom a bill of exchange is drawn.
5. Accrued/ Outstanding Expenses: These are expenses incurred during an accounting
period for which payment is not made. Payments for such expenses are made only
in the next accounting periods. Expenses already due for payment are referred to as
“accrued and due” and expenses which are not yet due are referred to as “accrued
but not due”
6. Accrued/ Outstanding Income : These are the earnings during an accounting period
which are recognized as income but are not realized during that accounting period.
They are expected to be realized only in the next accounting periods. Income already
earned and due to be received is referred to as “accrued and due and Income
earned but not due to be received is referred to as “accrued but not due”.
7. Amortization : It is reduction or liquidation of an amount gradually over a period of
time according to a specified schedule. (e. g. preliminary expenses incurred by a
company are usually amortised over a period of initial five years).
8. Audit: Auditing is the independent examination of financial information of any
entity, whether profit oriented or not, and irrespective of its size or legal from. Such
an examination is conducted with a view to express an opinion thereon.
9. Bad Debt: When all possible efforts to collect an amount, without any further loss,
have failed, the debt is said to have become bad. A Bad debt represents loss and
therefore, has to be written off.
10. Bills of Exchange: “Bill of Exchange” is an instrument in writing containing an
unconditional order or an undertaking to pay a certain sum of money to a definite
person named therein or to his order. A Bill of Exchange that contains an under
taking or promise only is called a “promissory Note”.
 In the case of “On Demand Bill” the amount noted therein is payable on
demand/presentation.
On demand bill is also known as “Sight Bill”
11. Creditors: Creditors are the personal accounts showing credit balances representing
amounts payable for goods purchased or services availed. The term Accounts
payable also denotes creditors.
12. Cutoff Date: It is a selected date by which transactions are temporarily stopped to
carry out certain activities to close the books of accounts for a specified period .
{ E.g.to take closing stock inventory.)
13. Debtors: Debtors are the personal accounts showing debit balances representing
amounts receivable for goods supplied or services rendered. The term Accounts
Receivable also denotes debtors..
14. Depreciation: Depreciation is the reduction in the value of an asset due to usage,
passage of time, wear and tear, technological outdating or obsolescence, depletion,
inadequacy, rot, rust, decay or other such factors.
15. First in First Out (FIFO) : A method of valuation of inventory, by which the cost are
allocated on the assumption that goods are consumed or sold in the order in which
they are received and taken into stock.
16. Internal Audit: This type of audit is an appraisal of controls within an organization to
check whether the prescribed policy or procedure is followed/met and economically
and efficiently used to achieve the objectives of organization, conducted by an
auditor working for the organization’s management.
17. Last In First Out (LIFO): A method of valuation of inventory in which the cost are
allocated on the assumption that goods consumed or sold are the goods which are
purchased most recently, or we can say that goods purchased last is consumed first.
18. Lease: A lease is an agreement whereby the lessee in return for a payment or series
of payment, the right to use an asset for an agreed period of time.
19. Materiality: An item, the disclosure or non- disclosure of which, might influence the
decision of the user of a financial statement, is a material item. All material items
should be disclosed In financial statements.
20. Petty Cash: Cash set aside and held separately to pay small obligations. In Imprest
system of petty cash, a fixed amount is advanced to the petty cashier once, and
afterwards payments for petty cash are made as reimbursement of expenses, only
on production of vouchers for the amount spent.
21. Salvage Value : An estimate of the amount that will be realized from the left over
of an asset, destroyed by fire or other accidents or at the end of its useful life. It is
sometimes referred to as scrap value.
22. Taxable Income: It is the Adjusted Gross total Income of an accounting year less
deductions, if any allowable under the income tax Act. In other words, it is the
income on which income tax is payable.
23. Revenue: gross amount received or due after supplying goods or rendering services.
24. Expense: Expense is the cost incurred in producing and selling the goods and
services. Accounting to Finney and Miller, “Expense is the cost of use of things or
services for the purpose of generating revenue.”
25. Expenditure: It is the amount of resources consumed; usually it is of long term in
nature. Therefore its benefit continues to be derived in future, for example,
purchase of machinery etc.
26. Assets: Anything which will enable a business enterprise to get cash or a benefit in
future is an asset. Asset can be:
a) Current Assets: Resources that are available or can be readily made available to
meet the cost of operations or pay current liabilities. There are usually
converted in cash and, hence lose their existences within a year i.e. Cash, bank,
Debtors, Stock, Accrued Income, Prepaid expenses etc.
b) Liquid assets: Generally all current assets excluding stock and prepaid expenses
are considered as Liquid assets. Liquid assets usually comprise of cash, cash
equivalents and receivables and any other assets which can be quickly & easily
converted into cash.
c) Fixed assets: assets held for long period i.e. buildings, plant & machinery,
furniture, live-stock, equipments etc.
d) Wasting assets: wasting assets are those assets which are consumed through
being worked or used, such as mines. As soon as all the minerals have been
extracted, the mine becomes valueless. Oil wells have the same characteristics.
Wasting assets also include assets which get exhausted with the lapse of time,
such as patents, trade marks, leasehold properties etc.
e) Intangible assets: assets that have no shape, body and cannot be seen or
touched but have value i.e. goodwill, trademark, patents, leasehold etc.
f) Tangible assets: assets that have shape, body and can be seen & touched i.e.
machinery, buildings, furniture, vehicles etc.
g) Fictitious assets: those assets which have no real value but appear in books due
to technical reasons i.e. preliminary expenses, research & development
expenditure.
27. Liability: probable future sacrifice of economic benefits arising as a result of past
transactions or events. It is a present obligation to be met by transfer of goods,
rendering service, or payment of money. Liabilities can be:
A) Current liabilities: these are obligations which are payable within a short period
(1year) from current assets or from current resources i.e. creditors, b/p, unpaid
expenses, unearned incomes, overdraft etc.
B) Non current or long term liabilities: these are obligations which are not payable
within a short period (1year) i.e. loans. Capital, debentures etc.
C) Internal liability: payable to owners i.e. capital, retained earnings etc.
D) External Liability: Payable to outsider i.e. unpaid exp. , Creditors, B/P.
E) Contingent liability : An item which may or may not become a liability depending
upon the occurrence or non occurrence of an event on a future date. Occurrence
of the event is the determining factor, after which the uncertainty vanishes. It is
not necessary that a liability. (E.g. Claims against a company not acknowledged
as debt. A suit may be pending before a court. The liability of the company is
contingent until a judgment is pronounced by the court.)
28. Types of Accounting: 1. Cash Based Accounting 2. Accrual Method of Accounting.
29. Cash Based Accounting : The cash method recognizes revenue when payment is
received, and recognizes expenses when cash is paid out.
30. Accrual/Mercantile Accounting : The accrual method of accounting requires that
revenue be recognized and assigned to the accounting period in which it is earned.
Similarly, expenses must be recognized and assigned to the accounting period in
which they are incurred. Although many companies use the accrual method of
accounting, some small businesses prefer the cash basic. The accrual method
generates tax obligations before the cash has been collected. This benefits the
Government because the Govt. gets its tax money sooner.
31. Branches of Accounting : 1. Financial Accounting, 2. Cost Accounting, 3.
Management Accounting
32. Financial Accounting: Financial Accounting is the process of summarizing financial
data taken from an organization’s accounting records and publishing in the form of
annual (or more frequent) reports for the benefit of people outside the organization.
33. Cost Accounting : Cost accounting establishes budget and actual cost of operations,
processes, departments or product and the analysis of variances, profitability or
social use of funds.
34. Management Accounting : Management accounting is concerned with the
provisions and use of accounting information by managers within organizations, to
provide them with the basic to make informed business decisions that will allow
them to be better equipped in their management and control functions.
35. Book-Keeping: Book keeping is the art of recording the transaction in the books of
original entry and the ledgers. This work is usually performed by junior clerks who
are sometimes called book keepers or account keepers. This work is of mechanical
nature and does not require any specialized knowledge of the principles of
accountancy. The work of such clerks is supervised by a man who is called an
accountant.
36. Accountancy: Accountancy involves the preparation of the final accounts to show
the results of the business at the end of a particular period. The man who is engaged
with this work is called an accountant. His work is not only of supervising the work of
book keepers but also to analyze, review and draw conclusions from the final
account. His work is of specialized nature and he must be well versed with the
principles of accountancy.
37. Proprietor: The persons who makes the investments and bears all the risks
connected with the business is called the proprietor.
38. Entity: This is an economic unit that is performing economic activities. For example,.
Reliance Petrochemicals Limited, Malvika Steel, Bharat Chemicals are entities.
39. Capital: It means the amount invested by the proprietor in the business enterprises.
It can be increased or decreased according to need. Profit of business increases the
capital and loss of the business decreases the capital. For the business, capital is a
liability towards the owner’s equity or net worth or net assets. It is the amount with
the help of which goods and assets are purchased in the business.

Capital = Assets – External liabilities

40. Event: There are happenings, which are of some relevance/ importance to an entity.
For example, raw materials purchased for use in production process, goods sold to
customer, salary paid to staff, new machinery purchased for factory etc.
41. Business Transaction: A Business Transaction is an exchange in which each party
receives or sacrifices value . in other words, in every business transactions there is a
movement of value from one party to another party. For example, when goods are
of cash from buyer to seller.
42. Voucher: It is a document, which acts as the proof of a business transaction. For
example, in case of cash purchase, cash memo is the voucher(proof). Again in case
of credit purchased purchase invoices are the voucher. Voucher are the document
on the basic of which business transaction are recorded in the books of accounts.
43. Entry: This is the recording of business transaction in the books of accounts. An
entry is made on the basic of voucher.
44. Income: It refers to the earnings from a particulars source e.g. Rent from Buildings
Interest on Deposits, Commission received etc.
45. Purchases: Goods bought for cash or on credit from supplier are known as
“Purchases’. There can be cash purchases or credit purchases.
46. Sales: Goods sold for cash or on credit to customers are known as sales. There can
be cash sales or credit sales.
47. Purchase Return: Goods returned to suppliers are known as ‘Purchases Return’ or
‘Return Outwards;.
48. Sales Return: Goods returned by customers is known as ‘Sales Return’ or ‘Return
Inwards’.
49. Drawings: Amount with drawn by the owner from the business for his personal use
are called as ‘Drawings’ It also includes goods taken from the business for the
owner’s domestic use. Drawing are permitted only to sale traders and partnership
firms, It is not available to joint stock company from of organization.
50. Discount: When customers are allowed any type of reduction in the prices of
goods/serves by the businessman, it is called discount. When some discount is
allowed in price of goods on the basic of sale of items. Then it is called trade
discount but when debtors are allowed some discount in prices of the goods for
quick payment , it is called cash discount. Trade discount is not recorded in the
books of accounts because it is shown as deduction in the receipt or invoice but cash
discount is always recorded in the books of accounts.
51. Profit: It is the net result of the trading activities of business and it is synonymous
with the term net income. It is the excess of total revenues of the business over the
total expenses during an accounting period. It increases the owner’s equity/ capital.
52. Gain: It is the surplus made in the sale or exchange of assets other than trading
goods.
53. Loss: It refers to a situation where nor lesser amount is received against the value of
goods sold or services given. Losses can also occur due to reasons like Payment for
Compensation, Fines, Theft, Fire etc.
54. Reserve: This means that part of the profit of the business which has been kept aside
for future use or contingency.
55. General Reserve: General reserve is that reserve which is not created for a specific
purpose. This is a reserve which is created every year to meet any unforeseen
contingency in future or to utilize same for expansion of business or any unspecified
purpose. It is also known as ‘free reserve’.
56. Specific Reserve: Specific reserve is the reserve, which is created by setting aside a
portion of the profit every year for a specific purpose. For example, Dividend
Equalization Reserve, Investment Fluctuation Reserve etc.
57. Capital Reserve: Capital reserves are not available for distribution among
shareholders as dividend, in the case of companies. They are built out of capital
 profits as against ordinary trading or revenue profit. For example premium on the
issue of shares and debentures, profit prior to incorporation etc. they can be utilized
for writing off capital losses or for issue of bonus shares.
58. Revenue Reserve: A revenue reserve implies any reserve which is not a capital
reserve and which is therefore available for distribution as dividend, e.g. general
reserve.
59. Secret Reserve: Secret reserves are reserve which are not known to the members of
the company. When secret reserve exist, the financial position of the company is
better than what appears in the Balance Sheet.
60. Provision: This means any amount set aside as a charge against profit to meet a loss
which may arise on the realization of certain assets or to meet a known liability, the
amount of which cannot be determined with substantial accuracy, for example,
Provision for taxation, provision for depreciation etc. it should be noted that
provision is in the nature of a precautionary measure against an anticipated loss or
liability and constitutes a charge against profit while reserve is created out of profits
and is thus an appropriation of profits.
61. Balance Sheet: It is a summary of the assets, liabilities and capital of a business
entity as on a specified date, usually at the end of the last date of the accounting
period.
62. Income Statement (or Profit and Loss Account): It is a summary of the revenue and
expenses of a business for a specified period of time, generally one year.
63. Operating Expenses: These include expenses that can be associated definitely with
the principal activities of the business like selling expenses and general
administration expenses.
64. Non-operating Expenses: Expenses that cannot be associated definitely with the
principal activities of the business are non-operating expenses, e.g. interest paid.
65. Operating Income: The excess of gross profit over total operating expenses is called
net income from operations i.e. operating income.
66. Non operating Income: Income that cannot be associated with the principal activities
of the business is non-operating income. Example-Rent received, Dividend received
etc.
67. Operating Loss: If operating expenses exceed gross profit. The excess is designated
as net loss from operations i.e. operating loss.
68. Equities: The right or claims on the assets of a business are referred to as equities, If
the assets owned by a business amount to Rs. 10Lakhs, then the equities in the asset
must also be Rs. 10Lakhs. The relationship between the two is stated in the form of
an equation i.e. Assets=Equities.
69. Creditor’s Equities and Owner’s Equities: Equities are subdivided into two principal
types; the right of creditors and the rights of owners. The equities of creditors
represent debts of the business and are called Liabilities. The equities of the owners
is called capital or owners equities.
70. Net working capital: This is the excess of current assets over the current liabilities.
71. Goods: It refers to commodities which a business deals within. It refers to the things
which are bought for the purpose of resale or raw material which is purchased for
the purpose of manufacturing the finished articles meant for sale.
72. Stock or Inventory: The term ‘Stock’ includes the value of goods which are lying
unsold . the stock may be of two types:-
a) Opening Stock: The term ‘Opening Stock’ means the value of goods lying unsold
at the beginning of the accounting period.
b) Closing Stock: The term ‘Closing Stock’ means the value of goods lying unsold at
the end of the accounting period.
73. Types of Stock: In the case of a manufacturing concern, there can be three types of
opening and closing stock.
a) Stock of Raw Material: It includes stock of raw materials purchased for using
them in the products to be manufactured, but still lying unused. For example,
the value of cotton in case of Cloth Mill is the stock of raw material.
b) Stock of Work-in-Progress: It is also termed as stock of partly finished goods. It
means goods in semi-finished products. In case of cloth mills the value of threads
and the unfinished cloth will be stock of work-in-progress.
c) Stock of Finished Goods: It includes the stock of those goods which have been
completely processed and are ready for sale but are lying unsold. In case of cloth
mills the value of finished cloth will be the value of finished goods.
74. Capital Expenditure: Capital expenditure is that expenditure which is incurred , for
acquiring or bringing into existence, an assets or advantage of an enduring benefit or
for extending or improving a fixed asset or for substantial replacement of an existing
fixed assets.
75. Revenue expenditure: An amount spent of earning or providing revenue is called
revenue expenditure. Such expenditures yield benefit within accounting period in
which they are incurred. In other words, all establishment and other expenses
incurred in the conduction and administration of the business , come under the
heading of ‘revenue expenditures’. All revenue expenditures and receipts are taken
to trading and Profit and Loss account and all capital expenditures and receipts are
taken to Balance Sheet. Any expenditures which is incurred for acquiring or
increasing the value of fixed assets is termed as capital expenditures. As such the
amount spent on the purchase of land & Building , Plant and Machinery, Furniture
 etc, is capital expenditure. Such expenditures yields benefit over a long period of
time and hence are treated as assets.
76. Deferred Revenue expenditure: Deferred revenue expenditure is that expenditure
which yields benefits which extend beyond a single accounting period for which a
capital expenditure is expected to yield benefits.
77. Goodwill: Goodwill is the Value of a business entity not directly attributable to its
assets and liabilities. E.g. The name “Murli Pan Bandar”, “Shyam Misthan Bhandar”,
“Mehta Book Store”, etc. are goodwill.
78. Trademark: A trademark is a distinctive sign or indicator used by an individual,
business organization , or other legal entity to identity that the products or services
to consumers with which the trademark appears originate from a unique source,
and to distinguish its products or services from those of other entities. E.g. NIFA,
Logo of any company etc.
79. Copyright: Copyright is a from of intellectual property that gives, the author of an
original work, exclusive right, for a certain time period, in relation to that work,
including its publication, distribution and adaptation, after which time the work is
said to enter the public domain . E.g. © this sign general placed on books shows
that apart from author no one can publish those book.
80. Patents: A patent is a set exclusive right, granted by a state (national government) to
an inventor or his assignee, for a limited period of time, in exchange for a public
disclosure of an invention .e.g. model of any motor cycle, car, A.C. etc.
81. Merchandise: Merchandise means the goods in which the proprietor does business.