Accounting Terms
CHAPTER-2
(BASIC ACCOUNTING TERMS)
Entity
Entity means a thing that has a definite
individual existence. There are two types of entities
a)
Business
entity
Entities which are
formed for earning income by providing service or selling goods are known as
Business entities. For example, TATA Ltd., Reliance Industries, Vimal garments etc.
b)
Non
Business entity
Entities which are
formed for service motive are known as non-business entities. For example,
Delhi public Library, Delhi University, etc.
Economic events/ business
transactions
Every activity of financial nature having
documentary evidence, capable of being presented in numerical, monetary term
causing effect on assets, liabilities, capital revenue and expenses is termed
as Business transactions.
Special features of business
transactions are as under
(i)
Business transactions must be
financial in nature.
(ii)
Business transactions must be
supported by documentary evidence
(iii)
Business transactions must be
presented in numerical monetary terms.
(iv)
Business transactions must
cause an effect on assets, liabilities, capital, revenue and expenses.
Assets
Anything which will enable the firm to get
cash or benefit in the future is an asset.
In other word assets are valuable resources owned by a business which
were acquired at a measurable money cost. These basic terms are discussed as
under:
(i)
Fixed
assets
Assets which cannot be converted into cash immediately
are called fixed assets, e.g., Land, Machine. In other words assets which are
acquired for long term use in the business are known as fixed assets. These
assets are not meant for sale. They increase the profit earning capacity of the
business.
(ii)
Current
assets
Assets which can be easily converted into
cash are known as current assets, e.g., Stock, B/R etc. These assets, also
known as circulating, Fluctuating or floating assets. It should be noted that certain assets, which
are popularly known as fixed may prove to be current by virtue of their
specific use such as Land will be current assets in the hands of land
developers and property dealers.
Building with the builders and property dealers and furniture with the
furniture dealers and furnishers.
(iii)
Fictitious
assets.
Fictitious assets are those assets, which
do not have physical form. They do not have any real value. Actually, they are
not the real assets but they are called assets on legal and technical ground.
They are also termed as deferred revenue expenditure. Fictitious assets do not
have real value, so they are written off in the future.
(iv) Tangible assets
Assets having physical existence which can
be seen and touched are known as tangible assets. These assets are land,
building, plant, equipment etc.
(v)
Intangible
assets
Intangible assets are those assets which do
not have physical existence, i.e., they cannot be seen and touched. Examples of intangible assets are patents,
goodwill, trademark, computer software, etc.
(vi)
Wasting
assets
Assets, whose value goes on declining with
the passage of time, are known as wasting assets. Mines, patents and assets
taken on lease are its examples.
Capital
Capital is the amount invested by the
proprietor or partner in the business. It may be in the form of money or assets
having a monetary value. It is the liability of the business towards the
proprietor or partner.
Equity /liability
Liabilities are the obligations or debts
payable by the enterprise in future in the form of money or goods. It is the
proprietors and creditors claim against the assets of the business.
Contingent liability
These are not the real liabilities. Future
events can only decide whether it is really a liability or not. Due to their
uncertainty, these liabilities are termed as contingent liabilities. For
example cases pending in the court of law etc.
Goods
Articles purchased for sale at profit or
processing by the business or for use in the manufacturing of certain other
goods as raw material are known as goods. Americans use the term merchandise
for goods.
Cost
Expenditures incurred in acquiring,
manufacturing and processing goods to make it sale worthy are termed as cost of
goods.
Revenue
Revenue in accounting means the amount
realised or receivable from the sale of goods. Amount received from sale of
assets or borrowing loan is not revenue. In wider sense, revenue is also used
to mean receipt of rent, commission and discount etc.
Expenses
It is the amount spent in order to produce
and sell the goods and services which produce the revenue.
Income
Profit earned during the period of time.
Expenditure
It is a payment for a benefit received.
(i) Capital expenditure- it is the amount spent in purchasing asset for receiving benefits for number of years. For example increasing the number of seats of picture hall is capital expenditure.
(ii) Revenue expenditure- It does not increase the earning capacity but it maintains the earning capacity of the business.
(iii)
Deferred Revenue Expenditure –
It is revenue expenditure in nature but is written off in more than one
accounting period. For example, advertising expenditure.
Losses
Losses are unwanted burden which the
business is forced to bear. Loss of goods due to theft or fire, or flood or
storm or accidents is termed as loss in accounting. Expenses are voluntarily
incurred to generate income where losses are forced to bear.
Profit
Excess of revenue over expense is termed as
profit.
Income
Increase in the net worth of the enterprise
either from business activities or other activities is termed as income.
Gain
Gain is a profit of irregular nature. It is
a profit that arises from transactions which are incidental to business such as
profit on sale of fixed asset or investments.
Debtors
The term represents the person or parties
who have purchased goods on credit from us. The one who gives
Creditors
The term represents the person or parties
who have sold goods on credit to us. The
one who takes
Proprietor
An individual or group of persons who
undertake the risk of the business are known as proprietors. They invest their
funds into the business as capital. Proprietors are adventurous persons who
make arrangement of land, labour, capital and organisation.
Drawings
Amount or goods withdrawn by the proprietor
for his private or personal use is termed as drawing.
Vouchers
Accounting transactions must be supported
by documents. These documentary proofs in support of the transactions are
termed as vouchers.
Accounting year
There is no legal restriction about the
accounting year of sole proprietorship and partnership firm. They may adopt the
accounting year of their choice. It may be between January 1st to
December 31st of the same year or July 1stof the year to
June 30thof the next year or between two Diwalis or even financial
year, i.e., April 1st to march 31stof the next year. The
only restriction is that the accounting period must consist of 12 months.
Discount
An allowance given in specific situation is
termed as discount. There are two types of discount
(i)
Cash discount – This discount
is allowed to the parties/debtors making prompt or immediate payment.
(ii)
Trade discount- This discount
is allowed on the basis of sales. Normally rate of discount is increased with
the increase in purchases.
Turnover
Turnover means total sales made in a
particular period say, one month, one quarter or one year etc.
Bad debts
The amount which is no more receivable from
the party/debtors is known as bad debts.
Insolvent
A
person, enterprise, business unit or company which is not in a position to pay
its debts or discharge its liabilities is known as insolvent.
Account
Account refers to a summarised record of
relevant transaction at one place of particular head.
Livestock
Domestic animals, such as cattle or horses
kept for home use or for making profit especially on a farm, is known as
livestock.
Firm
Any business, such as sole proprietorship,
partnership or corporation is called firm.
Prepaid expenses
It is an expense that has been paid in
advance and the benefit, of which will be available in the following year or
years.
Outstanding expenses
It is an expense that has been incurred but
has not been paid.
Stock (inventory)
Stock is a tangible asset held by an
enterprise for the purpose of sale in the ordinary course of business or for
the purpose of using it in the production of goods meant for sale.
Depreciation
Depreciation is a fall in the value of an
asset because of usage or with afflux of time or obsolescence or accident. It
is an allocation of cost of fixed asset in each accounting year during its
expected useful life.
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