AMITY UNIVERSITY HARYANA

AMITY BUSINESS SCHOOL

ACCOUNTING FOR MANAGEMENT

--------------------------------------------------------------------------------------------------------------------------------------

BASIC ACCOUNTING TERMS

• Entity

An entity means an economic unit that performs economic activities(Tata Steel, Reliance
Industries, Infosys)

• Event

An event is a happening of consequence to an entity(use of raw materials for production). Events

other than transactions do not involve exchange of value or resources and not immediately
measurable in monetary value(ex: quarrel between finance manager and production manager)

• Business transaction

A business transaction is an exchange in which each participant receives or sacrifices value( ex:
purchase of raw material for cash or credit). It involves an economic event that relates to a business
entity involving transfer of money or money’s worth

• Account

An account is a summary of relevant transactions relating to a particular head

• Assets

Assets refer to tangible objects or intangible rights of an enterprise which carry probable future
benefits. In other words, an asset is a resource controlled by the enterprise as a result of past events
and from which future economic benefits are expected to flow to the enterprise

(i) current assets: assets which are held in the form of cash,or for their conversion into cash
normally within 12 months from the date of balance sheet(ex:cash in hand, cash at bank, stock of
finished goods, debtors, bills receivables etc)

2/10, net 30

ii) fixed assets: refer to those assets which are held for the purpose of producing or providing goods
or services and those that are not held for resale in the normal course of business. Fixed assets may
be classified into

a) tangible fixed assets: refer to those fixed assets which have physical existence(ex: land and
building, plant and machinery, furniture etc)

b)intangible fixed assets: refer to those fixed assets which do not have physical existence(ex:
goodwill, patent, trademarks, copyrights etc)

(iii) Fictitious assets: fictitious assets either represent accumulated losses or deferred revenue
expenses not yet written off till the date of balance sheet
 • Capital

capital refers to the amount invested in an enterprise by the proprietor. This amount is increased
by the amount of profit and additional capital introduced and is decreased by the amount of losses
incurred and the amount withdrawn. It is also known as owner’s equity or net assets or net worth.
Capital=Assets-liabilities

• Drawings

refers to the total amount of cash or goods or any other asset withdrawn by the proprietor

• Goods

refer to the items in which the enterprise deals in or things which are bought and sold by business

• Purchases

refers to the total amount of goods obtained by an enterprise for resale or for use in the
production of goods or rendering services in the normal course of business

• Sales

refers to the amount for which the goods are sold or services rendered

• Stock(inventory or merchandise)

refers to tangible property held for sale in the ordinary course of business or for consumption in the
production of goods or services for sale(stock of raw materials)

• Trade debtors

refer to the persons from whom the amounts are due for goods sold or services rendered on
credit basis(ex: 5 Tvs are sold to Mr.Ram @ Rs20,000 each on credit, Mr.Ram is a trade debtor of the
business)

• Bills receivables

a bill of exchange is an unconditional order in writing given by the creditor to the debtor to pay on
demand or at a fixed or determinable future time, a certain sum of money to or to the order of a
specified person to the bearer. This bill of exchange is known as bills receivable for the creditor

• Trade receivables

This include trade debtors and bills receivables

• Trade creditors

refers to the persons to whom the amounts are due for goods purchased or services rendered on
credit basis(ex: 100 units are purchased at Rs 1000 each from Mr.Shyam on credit, Mr.Shyam is a
trade creditor of the business)

• Bills payables

bill of exchange is known as bills payable for the debtors

• Trade payables
 includes trade creditors and bills payables

• Capital expenditure

refers to an expenditure incurred to acquire assets to increase the productivity or earning

capacity(cost of land and building, cost of plant and machinery etc)

• Revenue expenditure

refers to expenditure incurred to maintain the productivity or earning capacity of a business, or to

carry out operating activities in the normal course of business(rent of machine, repairs of buildings,
insurance of business etc)

• Net profit

refers to the excess of revenue and gains over its related expenses and losses during an
accounting period. This increase owner’s equity.

• Gains

refers to increases in equity from incidental transactions of an entity and from all other
transactions and other events and circumstances the entity during the accounting period (ex: profit
on sale of securities is considered as operating gain, profit on sale of fixed asset)

• Voucher

refers to a documentary evidence in support of a business transaction( ex: in case of cash

purchases, cash memos and in case of credit purchases, purchase invoices are vouchers). They act
as source documents on the basis of which transactions are recorded in the books of accounts.