CHAPTER – 2

BASIC ACCOUNTING TERMS

In business various accounting terms are used. It is necessary to
understand these terms as they are part of the standard accounting
terminology.
1. Business Transaction: An Economic activity that affects financial
position of the business and can be measured in terms of money
example- sales of goods, purchases of goods, payment of interest
etc.
2. Event: An event is the consequence or result of a transaction.
3. Account : Account refers to a summarized record of relevant
transactions of particular head at one place. All accounts are divided
into two sides. The left side of an account is called Debit (Dr.) side
and the right side of an account is called Credit (Cr.) side.
4. Capital: Amount invested by the owner in the firm is known as
‘Capital’. It may be brought in the form of cash or assets by the
owner.
 CHAPTER-1
BASIC ACCOUNTING TERMS
 LEARNING
OBJECTIVES
The students will be able to :
Understand various Basic
Accounting Terms
In business various accounting terms are used. It is necessary to
understand these terms as they are part of the standard accounting
terminology.
1. Business Transaction: An Economic activity that affects
financial position of the business and can be measured in terms
of money example- sales of goods, purchases of goods,
payment of interest etc.
2. Event: An event is the consequence or result of a transaction.
3. Account : Account refers to a summarized record of relevant
transactions of particular head at one place. All accounts are
divided into two sides. The left side of an account is called
Debit (Dr.) side and the right side of an account is called
Credit (Cr.) side.
4. Capital: Amount invested by the owner in the firm is known
as ‘Capital’. It may be brought in the form of cash or assets by
the owner.
5. Drawings: The money or goods or both withdrawn by owner from
business for personal use, is known as Drawings. Example: Purchase
of Motor-bike for son by withdrawing money from business.
6. Assets: Assets are valuable and economic resources of an enterprise
useful in its operations. Assets are the properties owned by an entity or
enterprise. In other words, anything which will enable the firm to get
economic benefit in future, is an Asset. Assets can be broadly
classified as:
A. Current Assets: Current Assets are those assets which are held
for short period and can be converted into cash within one year.
For example: Goods are purchased with a purpose to resell and
earn profit, Debtors exist to convert them into cash.
B. Non-Current Assets: Non-Current Assets are those assets which
are hold for long period and used for normal business operation.
In other words, the assets which are held by an entity or
enterprise not with the purpose to resell but are held either as
investment or to facilitate business operations.
Example of non-current assets are Fixed Assets, Non-current
Investments etc.
Fixed Assets are those non-current assets of an enterprise which
are held not to resell but with the purpose to increase its earning
capacity. Fixed Assets are further classified into:
(i) Tangible Assets: Tangible Assets are those assets which have
physical existence and can be seen and touched. For Example:
Furniture, Machinery etc.
(ii) Intangible Assets: Intangible Assets are those assets which have
no physical existence and can be felt by operation. For example:
Goodwill, Patent, Trade mark etc.
C.Fictitious or Nominal Assets: These are the assets which
cannot be realised in cash or no further benefit can be derived from
these assets. These assets are not really assets but are shown on the
Assets side for the purpose of transferring them to the Profit & Loss
Account gradually over a period of time.
7. Liabilities: Liabilities are obligations or debts that an enterprise
has to pay after some time in the future. It means amount owed
(payable) by the business. Liability towards the owners of the
business is termed as Internal Liability. On the other hand,
liability towards the outsiders is termed as External Liability.
Liabilities can be classified as:
(a) Current Liabilities: Current Liabilities are obligations or
debts that are payable within a period of one year. For ex-
Creditors ,Bill Payable, Short-term loans etc.
(b) Non-Current Liabilities: Non-Current Liabilities are those
obligations or debts that are payable after a period of more than
one year. Example: Bank Loan, Debentures etc.
8. Receipts: Receipt is the amount received or receivable for selling
assets, goods or services. Receipts are further categorised as:
(a) Revenue Receipts: Revenue Receipts are those receipts which
are occurred by normal operation of business like money received by
sale of business products.
 (b) Capital Receipts: Capital Receipts are those receipts which are
occurred by other than business operations like money received by
sale of fixed assets.
9. Expenditure: Spending money or incurring a liability for acquiring
assets, goods or services is called Expenditure. The expenditure is
classified as :
(a) Revenue Expenditure: It is the amount spent to purchase goods
and services that are used during an accounting period is called
Revenue Expenditure. For Example: Rent, Interest etc.
(b) Capital Expenditure: If benefit of expenditure is received for
more than one year, it is called Capital Expenditure. Example:
Purchase of Machinery.
(c) Deferred Revenue Expenditure: There are certain expenditures
which are revenue in nature but benefit of which is derived over
number of years. For Example: Huge Advertisement Expenditure.
10. Expenses: Costs incurred by a business for earning revenue are
known as Expenses. For example: Rent, Wages, Salaries, Interest etc.
11. Income: Income is the surplus of Revenue over Expenses.
Income = Revenue - Expenses
12. Profit : The excess of total revenues over its related total expenses
during an accounting year is profit.
Profit = Total Revenue – Total Expenses
13. Gain: A non-recurring profit from events or transactions
incidental to business such as sale of fixed assets, appreciation in
the value of an asset etc.
14. Loss: The excess of total expenses of a period over its related total
revenues is termed as loss.
Loss = Expenses – Revenue
15. Goods: The products in which the business deal in. The items
that are purchased for the purpose of resale and not for use in the
business are called goods.
16. Purchases: The term purchases is used only for the goods
procured by a business for resale. In case of trading concerns it is
purchase of final goods and in manufacturing concern it is
purchase of raw materials. Purchases may be cash purchases or
credit purchases.
17. Purchase Return: When purchased goods are returned to the
suppliers, these are known as purchase return. It is also termed as
‘Return Outwards’.
18. Sales: The term ‘Sales’ is associated with or used for sale of
goods. These goods may be purchased for resale or manufactured
by the enterprise. Sales may be cash sales or credit sales.
19. Sales Return: When sold goods are returned from customer due
to any reason is known as sales return. It is also termed as ‘Return
Inwards’.
20. Debtors: Debtors are persons and/or other entities to whom
business has sold goods and services on credit and amount has not
received yet. These are assets of the business.
21. Creditors: If the business buys goods/services on credit and amount
is still to be paid to the persons and/or other entities, these are called
creditors. These are liabilities for the business.
22. Bill Receivable: Bill Receivable is an accounting term of Bill of
Exchange. A Bill of Exchange is Bill Receivable for seller at time
of credit sale.
23. Bill Payable: Bill Payable is also an accounting term of Bill of
Exchange. A Bill of Exchange is Bill Payable for purchaser at time
of credit purchase.
24. Discount: Discount is the rebate given by the seller to the buyer. It
can be classified as :
(a) Trade Discount: The purpose of this discount is to persuade the buyer to buy
more goods. It is offered at an agreed percentage of list price at the time of selling
goods.
This discount is not recorded in the accounting books as it is deducted
in the invoice/cash memo.
(b) Cash Discount: The objective of providing cash discount is to
encourage the debtors to pay the dues promptly. This discount is
recorded in the accounting books.
25. Stock : The goods available with the business for sale on a
particular date is known as stock. The stock may be of two types:
(i) Opening Stock means the value of goods in the beginning of the
accounting year.
(ii) Closing Stock means the value of goods at the end of the
accounting year.
26. Inventory: In the case of manufacturing concern, it comprises
processed goods manufactured for the purpose of resale. It is valued at
cost or net realisable value, whichever is lower. Inventory is classified
into four classes:
(i) Inventory of Raw Material: It comprises the stock of raw material
used for manufacturing of goods lying unused.
(ii) Inventory of Work-in-progress: It is a stock that is in the process
of being finished, i.e., they are partly finished goods. It means
goods in semi-finished form.
(iii) Inventory of Finished Goods: It includes the inventory of those
goods which have been completely processed and are ready for sale
but lying unsold at the end of the accounting period.
(iv) Inventory of Stock-in-trade: It includes the value of those goods
which are purchased for reselling.
27. Cost : Cost refers to expenditures incurred in acquiring,
manufacturing and processing goods to make it saleable. It is the
amount of expenditure incurred on or attributable to a specified
article, product or activity.
28. Voucher: The documentary evidence in support of a transaction is
known as Voucher. For example, if we buy goods for cash we get
cash memo, if we buy goods on credit, we get an invoice, when we
make a payment we get a receipt.
29. Goods & Service Tax(GST): All indirect taxes like Excise Duty,
Sales Tax, VAT, Service Tax etc. have been merged into a single tax
known as GST. GST is paid at the time of purchase and is
collected at the time of sale.
30. Entry: A transaction and event when recorded in the books of
accounts is known as ‘Entry’.
31. Bad Debts: It is the amount that has become irrecoverable from a
Debtor. It is a loss for the business and is, thus, debited to Profit &
Loss Account.
32. Solvent: Solvent is a person or enterprise which is in a position to
pay its debts.
33. Insolvent: Insolvent is a person or enterprise which is not in a
position to pay its debts.
34. Stores: The term ‘Stores’ is used to denote materials held by an
enterprise for the purpose of consumption in the business and not
for resale. Example are packing materials, spare parts of machinery
etc.
35.Revenue From Operations: It refers to the revenue earned by an
enterprise from its operating activities. It includes revenue from sale
of goods and revenue from sale of services.
36.Entity: An entity or business entity means an economic unit which
is formed for earning income by providing service or selling goods.
Example L.G. Electronics, Reliance, Bajaj Auto etc.
37. Turnover: Turnover means total sales made in a particular period.
38. Livestock: Domestic animals, such as cattle or horses are known as
Livestock.
36. Investments: It refers to deployment of funds in the Shares or
Debentures of Companies with the intention of earning a return.
 ASSIGNMENT - 1
1. Purchases is a Revenue. (True / False)
2. Rent Payable is a Liability. (True / False)
3. Machinery used in production is not a Fixed Asset. (True / False)
4. Amount of debts _____________ from the Debtors are termed as Bad
Debts.
5. A person to whom a firm owes money for purchase of goods is a
_________.
6. Which of the following is not a business transaction?
(i) Bought Furniture of ₹ 25,000 for business.
(ii) Paid for Salaries of Employees ₹ 20,000.
(iii) Cash withdrawn from personal Bank Account for personal use.
(iv) All of the above
7. Reduction in amount payable allowed by the seller of goods after the
goods have
(a) Rebate (b) Trade Discount
(c) Cash Discount (d) None of these
8. Which of the following are goods?
(a) Machines manufactured for sale
(b) Furniture purchased for sale
(c) Books and Stationery purchased by a book seller
(d) All of the above
9. What is meant by Revenue from Operations?
10. What is meant by Expenditure?