Financial Accounting

Book keeping: It is a scientific method of recording day to day business transactions in

words and figures in the books of accounts so as to show correctly and clearly the
financial position of a business.

Accountancy: It is a systematised knowledge of accounting and is regarded as an

academic subject like economics, statistics, mathematics etc. Accountancy tells us why
and how to prepare the books of account and how to summarise the accounting
information and communicate it to the interested parties.

Accounting: Accounting is the process of (1) identifying, (2) measuring, (3) recording,
(4) classifying, (5) summarizing, (6) analyzing, (7) interpreting, and (8) communicating,
the financial transactions and events in monetary terms.
Accounting refers to the actual process of preparing and presenting the accounts. Thus,
Accountancy is a science, a body of systematised knowledge, whereas Accounting is the
art of putting such knowledge into practice.

Some Basic Terms

1. Transaction: It is an act of exchange of goods or services between two or more

persons for a consideration usually in money.

Transactions are of two kinds: i) cash transactions, ii). Credit transactions. Cash
transactions are those in which cash is involved in the exchange. For example, purchase
of goods for cash, purchase of vehicle for cash, payment of rent, etc. In case of credit
transactions cash is not paid immediately, the settlement is postponed to a later date. For
example, goods are purchased on credit on , and the cash is to be paid
on .

2. PERSON: The term ‘Person’ includes not only individuals but also institutions or
associations like companies, banks, co-operative societies, partnership firms etc.

3. Goods: The term ‘goods’ refers to articles in which the business deals. Only those
articles which are purchased for the purpose of sale are called goods. Other articles which
are purchased for the purpose of using them in the business are not called goods. For
example, in case of a furniture dealer, tables and chairs are goods. He may be having
fans, but they are not goods for him.

4. Debtor: A debtor is a person who owes some amount to the business. For example, a
customer who purchases goods on credit from the business enterprise is a debtor to the
business enterprise.

5. Creditor: A creditor is a person whom the business enterprise owes some amount.
One who supplies goods or provides some services on credit to the business is a creditor.

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6. Assets: Assets are things of value or properties owned by the business enterprise. E.g.
land, buildings, machinery, vehicles, furniture, stock of goods, cash, amount receivable
from a debtor etc.

7. Liabilities: Liabilities are the amounts payable by the business enterprise to outsiders.
E.g. Loan from a bank, creditors for goods supplied, rent payable, salaries payable,
interest payable to the lenders, are some examples of liabilities.

8. Capital: Capital is the money or money’s worth invested by the owner(s).

9. Drawings: Drawings refer to the money withdrawn or the value of goods taken by the
proprietor for personal use from the business enterprise.

10. Expenditure: Expenditure means the spending of money for some benefit/ service
received by the business entity. E. g. payment of salaries, rent, telephone expenses,
electricity expenses etc., are some examples of expenditure.

11. Income: Income, also called revenue, it is the amount earned by a business enterprise
by selling goods or by rendering services. Commission received, rent received etc. are
some other examples of income.

12. Profit: Profit is the excess of income over expenditure during a period of time.

13. Loss: Loss represent to the excess of expenditure over income during a period of
time. It also means money or money’s worth lost without receiving any benefit. For
example, cash or goods lost by theft or fire accident.

14. Gain: Gain is a profit that arises from events or transactions which are incidental to
business, such as sale of an asset, winning a court case etc.

15. Discount: It is an allowance given on the catalogue price or the sales price of goods.
There are two kinds of discount. Viz. Trade Discount & Cash Discount.
i) Trade Discount: It is an allowance on catalogue price of goods. Trade
discount is subtracted from the catalogue price and the net figure
appears in the sales invoice as selling price. Trade Discount does not
appear in the books of accounts.
ii) Cash Discount: Cash discount is an allowance given on sales price to
encourage prompt payment by the debtor or purchaser. Cash Discount
appears in the books of accounts.

16. Solvent: A person who is in a position to pay his debts (liabilities) as it becomes due.

17. Insolvent: A person who is not in a position to pay his debts in full and is so declared
by the court.

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18. Bad debts: The amount of debt which is unrealizable from a debtor who became
insolvent.

19. Stock: The amount of goods lying unsold or unused. It also includes stock of raw
materials and semi-finished goods.

20. Account: An account is a summarized record of all business transactions relating to a

particular person or an item.