Basic Accounting terms
Account - It is a record of transactions under a particular head. It not only shows the amount of transactions but also their effect and direction.
Books of Account - The records or books in which the financial transactions of an entity are recorded or transferred (posted). They include Journal and Ledger.
Journal - Journal is the book of primary (original) entry in which transactions are first recorded in a chronological order.
Ledger - Ledger is a book of final entry in which all transactions recorded in the book of original entry (i.e., Journal) are transferred/posted in the ledger in a sumarised and classified form.
Vouchers - It is a documentary evidence in support of the transaction.
Financial Statements or Final Accounts - These are the statements prepared at the end of the accounting period to determine the financial performance and financial position.
It includes Trading Account, Profit & Loss Account (Statement of Profit & Loss) and Balance Sheet.
Balance Sheet - It is a statement of financial position of an individual or an enterprise which exhibits its assets, liabilities, capital, reserves and other account balances at their respective book value.
In short, Balance sheet is the statement of balances of Assets and Liabilities.
Events and Transactions - All the operations and the activities of the entity is referred as Events whereas Transactions are the events which affect/change the account balance of the business or assets or liabilities (either the account balance/assets/liabilities increases or decreases).
All transactions are events but all events are not transactions.
Business - The term business is derived from the work ‘busy’. Therefore, business means being busy. In specific
sense, business refers to an occupation in which people regularly engage in activities related to purchase,
production and / or sale of goods and services with a view to earn profits.
Entity - An entity is an economic unit which performs economic activities. It may be business entity (eg. Reliance industries, TCS, Wipro, etc.) or non-business entity (such as NGOs, Trusts, Charitable hospitals, etc.).
Capital - Capital is the amount invested by the proprietor (in case of proprietorship) or the partners (in case of partnership business). It may be in the form of money or assets.
It is a liability of the firm towards the proprietors or partners.
It is also known as 'Owner's equity' or 'Net worth'.
Drawing - It is the amount withdrawn or goods taken by the proprietor or partner for personal use.
It is debited to the Drawing Account and is valued at their purchase cost.
Liabilities - Liabilities are the amount owed (payable) by the business. It is of two types -
- Internal liabilities - towards the owners
- External liabilities - towards other than owners like creditors, banks, etc.
On the basis of time period in which the liabilities are payable, liabilities are classified into two types -
- Non-Current liabilities (Long-term liabilities) - Liabilities payable after a period of more than 12 months.
- Current liabilities (Short-term liabilities) - Liabilities which is payable within a period of 12 months.
Note - Bankoverdraft is a current (short-term) liability.
Assets - Assets are the properties owned an entity or an enterprise. Assets can be classified into -
- Non-Current Assets - Non-current assets are those assets which are held by a business not with the purpose of resell but are held either as investment or to facilitate business operations.
- For example - Fixed assets (land, building, patents, goodwill, etc), long-term invertments, etc.
- Current Assets - Current assets are those assets which are held by a business with the purpose of converting them into cash within a short period of time, i.e., within 1 year.
- For example - Goods purchased to resell, bell receivable, etc.
- Fictitious Assets - Fictitious assets are the losses which are not written off in a year in which they are incurred but in more than one accounting period.
- Example of fictitious asset is Deferred revenue expenditure such as Advertisement expenditure.
- They are neither tangible nor intangible assets. They are coming into existence by an accounting entry.
Fixed Assets - These are the non-current assets held for the purpose to increase its earning capacity.
Fixed assets are classified into -
- Tangible Assets - Assets which have physical existence.
- For example - Land, Building, Machinery, etc.
- Intangible Assets - Assets which do not have any physical existence.
- For example - Patents, Goodwill, Trademark, Computer software, etc.
Contingent Assets - A contingent asset may be defined as a possible asset that arises from past events and
whose existence will be confirmed only after occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the enterprise.
It usually arises from unplanned or unexpected events
that give rise to the possibility of an inflow of economic benefits to the business entity.
For example - a claim
that an enterprise is pursuing through legal process, where the outcome is uncertain, is a contingent asset. As
per the concept of prudence as well as the present accounting standards, an enterprise should not recognize
a contingent asset.
Contingent Liabilities - A contingent liability is a possible obligation arising from past events and may arise in
future depending on the occurrence or non-occurrence of one or more uncertain future events.
An enterprise should not recognize a contingent liability in balance sheet, however it is required to be disclosed
in the notes to accounts, unless possibility of outflow of a resource embodying economic benefits is remote.
Provisions - Provision is a present liability of uncertain amount, which can be measured reliably by using a
substantial degree of estimation.
Provision is recognised when -
- An enterprise has a present obligation arising from past events: an outflow of resources embodying economic benefits is probable.
- A reliable estimate can be made of the amount of the obligation.
Difference between Provisions and Contingent Liabilities
Receipts- It is the amount received or receivable for selling assets, goods or providing any service.
Receipts are categorised into two groups -
- Revenue Receipt - It is the amount received in the normal course of business, i.e., amount received from the sale of goods and/or service or both.
- Capital Receipt - It is the receipt which is not revenue in nature.
- For example - Selling of fixed assets such as machinery, furniture, etc.
- It either reduce assets or increase liability.
Expenditure - Expenditure is the amount spent or liability incurred for purchasing assets, goods or taking services.
It is of two types -
- Capital Expenditure - It is the amount spent or liability incurred for purchasing assets or improving the existing assets. It is shown in the assets side of the balance sheet.
- For example - Amount spent on purchase of machinery
- Revenue Expenditure - It is the expenditure incurred, the benefit of which is consumed or exhausted with the accounting period. It is shown in the debit side of the balance sheet.
Deferred Revenue Expenditure - It is a revenue expenditure but is written off (charged) in more than one accounting period because it is estimated that the benefit of such expenditure will be available in more than one financial year.
- For example - Expenditure on Advertising
Expense - Expense is the cost incurred for generating revenue.
It is of two types -
- Prepaid Expense - It is an expense that has been paid in advance and the benefit of which will be available in the following year or years.
- For example - Expense on insurance premium (paid for next 5 years in advance)
- It is an asset for the business.
- Outstanding Expense - It is an expense that has been incurred but not has been paid.
- It is a liability for the business.
Difference between Expenditure and Expense
Preliminary Expenses (Expense before incorporation) - The expenses incurred when a company is formed before the start of any business are termed as preliminary expenses.
It is a type of Deferred Revenue Expenditure.
Revenue - It is the amount received or receivable by the enterprise from its operating activities.
Note - Sales is recognised as revenue at the point of sale or performance of service.
Profit - Profit means income earned by the business from its operating activities, i.e., the activities carried out to earn profit (purchase and sale of goods and services).
Profit = Revenue - Expense
Income - Income is the profit earned during an accounting period. Income is a boarder term than profit and includes profit from activities other than its operating activities (such as sale of fixed asset, interest earned from FD in bank, etc.).
Income - Revenue - Expense + other profits
Gain - Gain is the increase in owner's equity resulting from transactions other than day to day transactions.
Loss- Loss is the excess of expense over its revenue.
Loss = Expense - Revenue
Purchase - Purchase means purchase of goods for resale or raw materials for manufacturing of goods.
Purchase return - It is the return of goods purchased (for any reason, say, they are defective). It is also known as Return Outward.
Sales - Sales means sale of goods manufactured.
Sales return - Goods sold when returned by the purchaser are termed as Sales return or Return Inward.
Stock- Stocks are the goods remaining unsold or unused in manufacturing of product .
They are valued at the cost or net realisable value (market value), whichever is lower.
It is of two types -
- Opening Stock - Stock in hand in the beginning of accounting year.
- Closing Stock - Stock remaining in the end of current accounting year.
Trade Receivables - It is the amount receivable against the sale of goods and/or services rendered in the ordinary course of business.
Trade receivables is the sum of total of debtors and bill receivables.
Trade Payables - It is the amount payable for the purchase of goods and/or service taken in the ordinary course of business.
Trade payables is the sum of total of creditors and bill payables.
Debtor and Creditor - Debtor is the person or an entity who owes amount to the enterprise against credit sale of goods and/or service rendered.
Creditor is the person or an entity to whom an enterprise owes amount against credit purchase of goods and/or service taken.
In short, Debtor is the borrower and the Creditor is the lender.
Bill receivable and Bill payable - Bill receivable is the Bill of exchange accepted by the debtor, the amount of which will be received on the specified date.
Bill payable is the Bill of exchange accepted by the person or an enterprise, the amount which will be payable on the specified date.
Discount - It is the reduction allowed in the value of goods sold. Discount allowed may be Trade discount, Cash discount or Rebate.
Trade Discount - It is the discount offered when a certain quantity/value of goods is bought.
For example - Buy 3 get 1 offer is an example of trade discount.
Trade discount allowed is not shown separately in the books of account.
Cash Discount - It is the discount offered for the timely payment of due amount. It is an expense for the party allowing the discount.
It is recorded in the books of account of both purchaser and seller.
Cash discount is written as (2/10, 1/20 or Net 30.
2/10 discount means a discount of 2% is offered, if the payment is done within 10 days. 1/20 discount means, a discount of 1% is offered if the payment is done within 20 days and Net 30 means that a maximum of 30 days of time is given for clearing the payment and after 30 days the debtor has to pay interest along with the payment.
Rebate - It is the discount allowed for other reason such as poor quality, excess supply, etc. It is allowed after the sale has been made.
Bad debts - Debts which are not recoverable are Bad debts. It is a loss for the business.
Legacies - It is an amount of money or property left to someone in a will.
Depreciation and Amortisation - Amortization is the practice of spreading an intangible asset's cost over that asset's useful life whereas Depreciation is the expensing a fixed asset as it is used to reflect its anticipated deterioration.
Usually, tangible assets are depreciated whereas the intangible assets are amortised.
Accrued Income - Accrued income is the revenue/income that has been earned but has yet to be received (i.e., income which is due).
It is an asset of the business.
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Note - This is my Vision IAS Notes (Vision IAS Class Notes) and Ashutosh Pandey Sir's Public Administration Class notes. I've also added some of the information on my own.
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Related Keywords
- Accounting basic terms
- Basic terms of Accounting
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- General Accounting Principle notes
- T.S. Grewal notes
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