Basic Accounting Terms

1. Business transactions:
- It is an economic activity that changes the financial position of
the business.
- Every business transactions results in change in the value of
some of the assets, liabilities or capital.
Features of business transactions:
- Economic activity
- Transactions are of two types internal and external
- Changes the financial position of the business.
- Must be capable of expressed in terms of money.
2. Event:
Result of the transactions is called as an event. Ex: we purchased
goods of Rs.50,000 and sold it for Rs.60,000 then Rs. 10,000 is the
profit which is the result of the business.
3. Account: (T shape)
It is record of all the business transactions relating to a particular
person, assets, liability, expenses or incomes.
- The place were all transactions are recorded is called as account.
- All accounts have two sides i.e. is debit and credit. (T shape)
4. Debit: (dr.)
The left hand side of an account is called as debit. The word debit
is derived from an italian word Debito.
5. Credit : (cr.)
The right hand side of an account is called as credit. The word
credit is derived from an italian word credito.
6. Entry:
An event or a transaction when is recorded in the books of the
account is called as entry.
7. Assets :
- The things or resources which are valuable or property of the
business is called as an asset.
- It also includes the amount due from others.
Features of assets:
1. Valuable
2. Owned by the business
3. Acquired at a measurable money cost

Types of assets
Non-current assets – examples: land, buildings, plant and
machinery and long -term investments
- Held by business for a long period of time
- Not meant for resale
a. Fixed assets:
- Assets which are required for purpose of reuse in the business
but not for purpose of resale.
- It increases the earning the capacity of the business
- Benefit is for a long period of time.
- Fixed at their place
i) Tangible Assets: assets which can be physically seen and
touched. (Land, Building, Plant and Equipment, Furniture & Fixture,
Vehicles, Office Equipments, Others).
ii) Intangible Assets: Assets which are not tangible i.e. which can’t
be seen and touch
(a) Goodwill (b) Brand / Trademarks/ copyright .
b Non-Current Investments:
Non-current Investments are investments which are held not with
the purpose to resell but to retain them.
Non- current Investments are further classified into ‘ Trade
Investments’ and ‘ Other Investments’.
Current Assets/short lived assets / active assets - examples: cash,
stock, debtors, prepaid expenses.
- Assets which are meant for resale.
- Converted into cash within one year.
- Benefit is derived for a period of one year.
Nominal assets/ fictitious assets examples: P & L (dr. balance),
advertising expenses (deferred revenue expenditure)
- Assets which cannot be realized in cash or no further benefit can
be derived from them.
- Actually they are the losses which were not written off in the year
in which they incurred.
8. Capital/ owners equity/ net worth/net assets
It refers to the amount of money which is invested by the owner/
proprietor in the business.
Capital = assets – liabilities
9. Drawings :
Any cash or the goods withdrawn by the owner for his personal use
is called as drawings.
Ex: personal expenses, household expenses, life insurance premium
and income tax.
10. Liabilities/ debt Examples – loans , creditors
- It refers to the money which a firm owes (payable) to the
outsiders.
- Obligation of the firm towards the outsiders.
- Liability to the owners is an internal liability and towards
outsiders (others) are external liabilities.

- Current liabilties are those liabilties which are to be paid in the

near future ( normaly within 1 year)
Ex- creditors , short term loan, outstanding expenses
- Non Current liabilties are those liabilties which fall due for
payment in a realtively long period ( normaly more
then 1 year)
Ex- long term loans, debentures
11. Receipts:
It is the amount received or receivable by selling goods, services or
assets. Two types of receipts are:
a. Revenue receipt:
- Amount received or receivable in the normal course of the basis
(day to day business activities).
- Shown in trading and profit and loss account.
- Ex: money obtained from sale of goods, commission received,
interest and dividend received.
b. Capital receipt :
- Amount received or receivable from the transactions which are
not revenue in nature.
- Shown in balance sheet as increase in liabilities or reduction in
assets.
- Ex: amount received by way of loans, selling fixed assets.
12. Expenditure:
- Disbursement of cash or transfer of property or incurring a
liability for the purpose of acquiring goods and services
- Amounts spend or liability incurred for the purpose of acquiring
goods and services.
- Any type of a payment for a receipt of a benefit is called as
expenditure.
Types of expenditure
a. Capital expenditure:
- Any expenditure which is incurred in acquiring (purchasing) assets
or increasing the value of fixed assets
- Benefit is received for a long period of time.
- Ex: purchase of fixed assets (machinery)
- It increases the earning capacity of the business.
- Shown in balance sheet assets side.
b. Revenue expenditure :
- Any expenditure whose benefit is derived within the accounting
period is called as revenue expenditure.
- Helps in maintaining the earning capacity of the business.
- Shown in Trading and P & L debit side.
- Ex: repair of the machinery, cost of goods sold, ren t etc.
c. Deferred revenue expenditure:
- It’s a type of a revenue expenditure whose benefit is derived for
more than one accounting year.
- It lasts for 3 to 7 years.
- Ex: a firm spends huge amount on advertising of their newly
launched product Rs.2,00,000 and the benefit is to be derived for a
period of 4 years. So every year is Rs.50,000 is debited to the P & L
account and remaining part is shown in balance sheet assets side
1st yr Rs.1,50,000,2nd yr Rs.1,00,000 and so on.
- As such whole expenditure is not shown in the P & l account only
a part (written off portion) is shown and remaining in shown in
balance sheet.
13. Expenses
- Cost incurred for generating revenue (producing and selling
goods and services).
- Value that had expired during the accounting year.
- Ex: cost of goods sold, rent paid, salary paid etc.
(i) Prepaid expenses/ unexpired amounts: expenses which are paid
in advance and there benefit will be derived in accounting year or
accounting years is called as prepaid expenses it is treated as an
assets.
It’s a Current asset. Ex: prepaid insurance
(ii) Outstanding expenses/ accrued expenses: expenses which are
due but not paid by the firm are outstanding expenses i.e. the
expenses whose benefit had been received but the amount is yet
not paid by the firm.
It’s a current liability. Ex: outstanding wages.
14. Income: income= revenue - expenses
- Surplus of revenue over expenses is called as incomes.
- The money received from the sale of the goods is revenue and
cost of goods sold is expense.
- Ex: goods costing Rs.50,000 are sold for Rs.70,000 so Rs. 70,000 is
the revenue, Rs.50,000 is the cost and the difference between them
is Rs.20,000 is income
15. Profits:
excess of total revenue over total expenses is profit. It’s of two
types gross profit and net profit. It increases the total investment of
the owner.
16. Gains: it’s a monetary benefit or advantage which is incidental
to the business. (irregular)
- EX: winning a court case, sale of fixed assets at a profit(buildings
costing Rs.50,000 are sold for Rs.70,000the difference between
them is Rs.20,000 is a gain)
17. Loss:
it conveys two meanings :
1. The result of the business (revenues during the year was
Rs.10,000 and expenses were Rs.25,000. Rs.5,000 is the loss )
2. Some fact or an activity which the firms receives without any
benefit ( loss by fire theft, fire etc.)
- Losses cause a reduction in the capital and they are different from
expenses as expenses are incurred revenue but losses are not.
18. Goods/merchandize :
- It includes all those things which are purchased for the purpose of
resale or which are used for producing final goods which will be
resold.
- A cloth dealer will purchase cloth, a furniture dealer will purchase
chairs and tables for resale(for others it’s an a ssets), a stationery
shop will purchase pen, pencil, copies (for others these are
expenses)
19. Purchases:
It refers to the purchase of goods in which the business deals .
- For a manufacturing concern raw materials are the goods which
will be converted into finished goods.
- For a trading concern it includes all those things which are
purchased for the purpose of resale.
- Ex: A cloth dealer will purchases cloth for sale, which is called as
goods but if the same cloth dealer purchases furniture for the
seating of the customers it is called fixed assets (not meant for
resale)
20. Purchase return / return outwards:
When the purchased goods are returned back to the supplier it is
called as purchase return.
21. Sales:
- Sale means transfer of ownership of goods or services for a price.
It includes only those goods which were meant for resale.
- The term sale is never use of sale of fixed assets its only used for
goods.
- EX: A cloth dealer will sell cloth which is called as sales but if the
same cloth dealer sells his furniture it is not called as sales.
22. Sales returns / return inwards:
When the sold goods are returned back by the customer is called
as sales return.
23. Stock / inventory :
Stock is the value of those goods which are lying unsold at the end
of the accounting year which were purchased for reseeling.
Two types are:
Opening stock: Goods lying unsold at the beginning of the
accounting year is called as opening sock.
Closing stock: Goods lying unsold at the end of the accounting
year is called as closing stock.
24. Inventory
In case of a manufacturer opening and closing inventory can be of
four types –
a. Inventory of raw material.
b. Inventory of work in progress.
c. Inventory of finished goods.
d. Inventory of stock in trade
Distinction of stock and inventory
Stock is the value of those goods which are lying unsold at the end
of the accounting year which were purchased for reseeling.
Whereas the inventory is wider term it includes stock also.
25. Debtors/ book debts:
the customers to whom goods are sold on credit are called as
debtors (current assets).
26. Creditors:
the suppliers who had supplied goods on credit to the business is
called as creditors.
27. Bills receivables :
a bills of exchange becomes a b/r when the persons who draws
it(creditor/drawer) on a debtor(drawee ) accepts it to pay a
specified amount to the specified person at the end of a specified
period.
28. Trade receivables:
debtors + bills receivables = trade receivables
29. Bills payables:
it refers to the bills of exchange accepted in favor of a creditor.
30. Trade payables :
Creditors+ bills payables = Trade payables
31. Cost: Amount of the resources which are given up in exchange
of some goods and services.
Two types are cost are:
a. Actual cost: This involves a cash outlay, ex: raw material
purchased, rent of a factory.
b. Notional cost: Which does not involves a cash outlay. Cost of
using the owners resources. EX(rent of owned factory)
31. Discount:
Rebate or an allowance given by the seller to the buyer. Two types
of discount are:
a. Trade discount: when a discount is given by the seller to the
buyer on the list price is called as trade discount.
Not shown in the books of accounts
* Purpose is to increase the sales.
b. Cash discount: when a discount is given to the customer for
making a prompt payment it is called as cash discount. Recorded in
the books of account * purpose is to collect prompt payment.
32. Vouchers:
It is a document which provides authorization to pay and on the
basis of which transaction are recorded in the books of original
entry.
- a separate voucher is prepared for every transaction.
- It specifies the accounts to be debited or credited.
33. Bad debts:
the amount which is not recovered from the debtors is called as
bad debts. It is a loss for the business.
34. Revenue:
it means any income from any recurring source. It includes the
money received from sale of goods, rent receipt
35. Solvent:
a person who is able to pay off his debts(liabilities) is called as
solvent person.
36. Insolvent:
a person who is not able to pay off his debts(liabilities) is called as
solvent person.
37. GST ( goods and service tax):
All indirect taxes like custom duty , excise duty, sales tax, VAT ,
service tax etc . have merged into a single tax known as GST.
GST is paid at the time of purchases and colleceted at the time of
sales.
38. Stores:
The material held by an entreprise for the purpose of consumption
in the business and not ofr resale.
Ex- lubricants, spare parts of machinery , packing materials etc.
39. Revenue from operations:
It is the revenue earned by any enterprise from its operating
activities . ex- revenue from sale and goods and services
40. Entity:
It is an economic unit which is formed for earning income by
providing goods and services.
Ex- JIO, honda etc