Basic Terms of Accounting
In accounting, many technical words are commonly used. Therefore, it is essential to know their meaning, without which knowledge of accounting subject will be incomplete.
1. Business
Any legal action that is done in order to earn income or profit is called business
Capital= Assets – Liability
2. Trade
Purchase and sale of goods and services in order to earn profit is called trade.
3. Profession
Any work done in order to earn profit which necessarily requires prior training and education is called a profession. For example doctors, lawyers, engineers etc..
4. Proprietor Or Business owner
The person who invests capital in the business and entitled to have all profits and losses of the business is called proprietor or owner of the business.
5. Capital
The amount of cash, goods or assets which is initially invested by proprietor while commencing business is called capital. It is invested to earn profits. In other words, the excess of assets over liability is capital.
6. Assets
All the resources of business having economic value are called assets. These resources help the business to earn a profit and have future value.
7. Liabilities
The amount which business owes to others is called its liabilities. There is a certain amount which business is under obligation to pay. There are two types of liabilities: –
a. Long-term liabilities
Those liabilities which are usually payable after a period of 1 year. Long-term loans from Financial Institutions, debentures issued by companies etc.
b. Short-term liabilities
These are those which are payable within one year. For example creditors, bank overdrafts etc.
8. Drawings
The amount of cash or goods which is withdrawn by proprietor from business for its private uses is called drawings. It reduces the capital of the business.
9. Goods
The things which are bought and sold by business are called goods. Goods maybe raw material work in progress of finished goods. In accounting, when goods are purchased it is written as purchases. When goods are sold it is written as sales. It is written as a stock if remain unsold at the end of the year.
10. Purchases
Goods bought for resale are called purchases. This may be in form of raw material or finished goods. Purchase of assets is not called purchases because assets are not purchased for resale.
11. Sales
When purchase goods are sold in order to earn a profit are called sales. When goods are sold for cash it is called cash sales and goods sold on credit are called credit sales.
12. Purchase return
Goods once purchased by the business, are returned back due to any reason is called purchase return or return outwards.
13. Sales return
Goods once sold to the customer when are returned back by them due to any reason then such goods are called as sales returns or return inwards.
14. Stock
These are those goods which are left unsold in the business at the end of the year. The goods unsold at the end of the accounting year are called closing stock. The same stock is called opening stock at the beginning of a new accounting year.
15. Revenue
These are the amount received by a business for selling goods or services. This amount is received from day to day business activity in the form of rent, interest, commission, discount, dividend etc.
16. Expenses
The cost which business incurs for producing goods and services or for using services is called expenses. These include payments made for wages, salaries, freight, advertisement, rent, insurance etc. In other words, we can say that the cost of earning revenue is an expense.
17. Expenditure
The amount which is paid for increasing profit earning capacity of business is called expenditure. It is of long period nature.
18. Income
That amount which increases the capital of the business is called income. The excess of revenue over expenses is also called income.
Income= Revenue- Expenses
19. Loss
When expenses incurred are more than revenue then this excess of expenses is called loss. This reduces the capital of the business.
20. Gain
It is a monetary receipt as a result of business transaction. The excess of revenue over the expenses is called gain.
21. Cost
Total of direct or indirect expenses which are incurred for the production of goods and services is called cost. Like the cost of raw material cost of labor and cost of other services used to make the article is called its total cost.
22. Discount
Concession a rebate allowed by a businessman 2 its customer is called a discount. it may be of two types: –
a. Trade discount
When a trader allows a concession to its customers on the list price, it is known as trade discount. It is not recorded in the books. It is stated in the invoice.
b. Cash discount
When a trader allows a concession to the customer to make payment in cash or by cheque, it is known as cash discount. It is recorded in the books. When cash discount is allowed customer is required to pay the less due amount, so it encourages the customer to pay as early as possible.
23. Debtor
The person, firm or an organization who takes goods or services on credit from the business are called debtors of the business. In other words, the person, firm or an organization who owes money or Money’s worth to the business is called debtor.
24. Creditors
The person, firm or an organization from whom goods or services are purchased on credit by the business are called creditors of the business. The business owes money to them. The amount payable to creditors is a liability of the business.
25. Receivables
The total amount which is to be received in business is called receivables.
26. Payables
The total amount which is to be paid by the business is called payables.
27. Entry
Recording of the transaction in account books is called making an entry or the record of a transaction in books is called an entry.
28. Turnover
The total amount of cash and credit sales during a particular period is called turnover.
29. Insolvent
A person is said to be insolvent when he or she is incapable to meet all his or her liabilities. Such a person has more liability than assets.
30. Bad debts
The amount which could not be recovered from debtors due to his insolvency or disability to pay is called bad debts.
31. Vouchers
The written document through which financial transactions are recorded in the books is called voucher.
32 Account
A list of all transactions relating to a person, property, income expenses is called into account. It is a tabular statement containing all the transaction of same nature at one place under a common heading in a systematic manner.
33 Debit and credit
Every account has two sides. Left side is called the debit side and the right side is called the credit side. In short, it is Dr. and Cr.
34 Commission
In a business activity, a remuneration is paid to the agent for his services, is called commission.
