0% found this document useful (0 votes)
14 views

Basic Concepts

Accounts

Uploaded by

Vinod Krishna
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
14 views

Basic Concepts

Accounts

Uploaded by

Vinod Krishna
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 6

1. Business Entity: It is an economic unit that performs economic activities.

For
accounting, it is assumed that business has separate existence and its entity is
different from that of its owner(s).
2. Sole trader: A single individual carrying on business with or without the help of
his kith and kin is called sole trader.
3. Partnership: It is a relationship between partners to contribute capital to start
business, agree to distribute profits and losses in an agreed proportion and the
business being carried on by all or anyone acting for all. Partnership firm refers to
business where as the partnership refers to relationship caused by the agreement.
4. Joint Stock Company: It is an organization, for which the capital is contributed by
shareholders to carry on business and it is registered under Companies Act and it
has a legal entity, having perpetual existence and a common seal.
5. Capital: Funds brought in to start business, by the owner/s. In the case of a
company, capital is collected by issue of shares. Capital used to purchase fixed
assets is called fixed capital and the capital used for day to day affairs of business
is known as working capital. From business point of view, Capital is a liability.
6. Equity: Equity is the residual interest in the asset of the enterprise after deducting
all its liabilities. The equity of a company is called shareholders’ equity. Its
components include share capital, share premium and retained earnings.
7. Share: A share in a company is one of the units into which the total capital of the
company is divided.
8. Assets: Assets are resources legally owned by the enterprise as a result of past
events and from which future economic benefits are expected to flow to the
enterprise. Eg: Land and buildings, plant and machinery, furniture and fixtures,
cash in hand and at bank, debtors and stock etc., are regarded as assets, Assets may
be fixed, current, liquid or fictitious.
9. Fixed Assets: Fixed assets are those which are held for use in the production or
supply of goods and services. E.g.: plant and machinery, which is used fairly for
long period.
10. Current Assets: Current assets are those which are held or receivable within a year
or within the operating cycle of the business. They are intended to be converted
into cash within a short period of time. E.g.: Stock in trade, debtors, bills receivable,
cash at bank etc.
11. Liquid Assets: Liquid Assets are those which can be easily converted into cash and
for instance, cash in hand, cash at bank, marketable investments etc.
12. Fictitious Assets: Fictitious Assets are in the form of such expenses which could
not be written off during the period of their incidence. For example, promotional
expenses of a company which could not be treated as expenditure in the year of
incidence are shown as fictitious asset.
13. Inventory: Inventory refers to goods held by a business for sale in the ordinary
course of business or for consumption in the production of goods or service for
sale. It includes stock of raw materials, stock of work in – progress and stock of
finished goods.
14. Debtor: A debtor is a person who owes money to the business. A debtor may be of
4 types as mentioned below:-
Debtor is a person who owes money to the business for the goods supplied to
him on credit.
A loan debtor is a person who owes money to the business for the loan
advanced to him.
Debtor for asset sold is a debtor who owes money to the business for any asset
sold to him on credit.
A debtor for service rendered is a debtor who owes money to the business for
the service rendered to him on credit.
15. Liability: It is a financial obligation of an enterprise arising from the past event,
the settlement of which is expected to result in an outflow of resources embodying
economic benefit. Eg. Loans payable, salaries payable, term loans.
16. Drawings: It refers to cash, goods or any other asset withdrawn by the proprietor
from his business, for his personal or domestic use. In short, the amount the owner
withdraws from his business for living and personal expenses.
17. Debt: The amount due from a debtor to the business is called a “Debt”, generally
debt may be of three types :
18. Good debt refers to fully recoverable debt.
19. Bad debt refers to debt, which is not recoverable (irrecoverable).
20. Doubtful debt refers to debt whose recovery is doubtful.
21. Current liability is that obligation which has to be satisfied within a year. For
example, payment to be made sundry creditors for the goods supplied by them on
credit; bills payable accepted by the businessman; overdraft raised by the
businessman in a bank etc.
22. Creditors: A creditor is a person to whom the business owes money. A creditor
also may be of 4 types.
Trade creditor is a person to whom the business owes money for goods
purchased from him on credit.
Loan creditor is a person to whom the business owes money for the loan
borrowed from him.
Creditor for asset purchased is a creditor to whom the business owes money
for any asset purchased from him on credit.
Expenses creditor refers to a creditor to whom the business owes money for
any service received from him on credit. For e.g.: salaries unpaid, commission
unpaid etc.
23. Income: The difference between revenue and expense is called income. For
example, goods costing Rs.25000 are sold for Rs.35000, the cost of goods sold, i.e.
Rs.25000 is an expense and the sale of goods i.e. Rs.35000 is revenue. The
difference, i.e. Rs.10000 is income. In other words, we can state that Income =
Revenue - Expense.
24. Gain: Usually this term is used for profit of an irregular nature, for example, capital
gain.
25. Expenses: Costs incurred by a business in the process of earning revenue are called
expenses. In general, expenses are measured by the cost of assets consumed or
services used during the accounting period. The common items of expenses are:
Depreciation, Rent, Wages, Salaries, Interest, Cost of Heating, Light and water and
Telephone, etc.
26. Loss: It means something against which the firm receives no benefit. It is a fact that
expenses lead to revenue but losses do not, such as theft.
27. Transaction: It is an event which involves exchange of some value between two or
more entities. It can be purchase of stationery, receipt of money, payment to a
supplier, incurring expenses, etc. It can be a cash transaction or a credit transaction.
Credit transaction is one where there is a promise to pay/receive cash at a future
date.
28. Goods: Goods refer to merchandise, commodities, products, articles or things in
which a trader deals. It is the commodities or things meant for resale. Goods
account is divided into six heads viz: purchase account, sales account, purchase
return account, sales return account, opening stock account and closing stock
account. Let us get the meaning of each one.
29. Purchase: Goods purchased by a business are called purchase. Goods purchased
may be Cash Purchases or Credit Purchases. Thus, Purchase of goods is the sum
of cash purchases and credit purchases.
30. Sales: Sales are total revenues from goods or services provided to customers. Sales
may be in cash or in credit.
31. Purchase Return or Return Outward: Goods returned by the business to its
suppliers out of the purchases already made from them are called purchase return.
32. Sales Return or Return Outward: Goods returned to a business by its customers
out of the sales already made to them are called Sales Return.
33. Opening Stock: Unsold goods lying in a business at the beginning of a year, are
called opening stock.
34. Closing Stock: Unsold goods lying in a business at the end of a year, are called
closing stock.
35. Bills Payable: It is a bill of exchange stating an obligation to pay a certain sum of
money at a specified date. In case of purchase of raw materials on credit the
supplier or the creditor draws bills of exchange on the business entity. When the
entity accepts the bill it becomes bills payable for the entity. The same bill for the
supplier is termed as bills receivable.
36. Bills Receivable: It is a bill of exchange containing an acceptance from the drawee
(or Payee) a certain sum of money at a specified date. On sale of goods on credit
the entity draws a bill of exchange on the customer. When the customer or debtor
accepts the bill it becomes bills receivable for the firm. Bills receivables can be
discounted with banks or discount houses.
37. Voucher: It refers to any written document in support of a financial transaction.
38. Journal: A journal is a daily record of business transactions. It is a book of original,
prime or first entry in which all the business transactions are first entered in the
specified manner in the order of dates. A preliminary record where business
transaction is first entered into the accounting system.
39. Narration: It is a brief explanation to a journal entry, given below the journal entry,
with in brackets. It gives the explanation for the particular journal entry.
40. Posting: Posting is the process of entering in the ledger the information already
recorded in the journal or in any of the subsidiary books. In other words process
of transferring balances from bookkeeping records called journals to a "final"
bookkeeping record called the general ledger.
41. Ledger: A ledger is an account book in which all the accounts are maintained. It is
the books of final entry as well as principal book of accounts.
42. Carried Forward: The term carried forward or its abbreviation [c/f] is used at the
foot of a page to indicate that the total amount at the foot of that page has been
carried forward to the head of the next page.
43. Brought Forward: The term brought forward or its abbreviation [b/f] is used at the
head of page to indicate that the total amount at the head of that page has been
brought forward from the foot of the previous page.
44. Carried Down: The term carried down or its abbreviation c/d is written in a ledger
account at the time of its closing to indicate that the balance in that account has
been carried down to the next period.
45. Brought Down: The term brought down or its abbreviation b/d is written in a
ledger account at the time of its opening to indicate that the opening balance in
that account has been brought down from the previous period.
46. Trial Balance: A worksheet listing of all the accounts appearing in the general
ledger with the amount of the debit or credit balance of each, used to make sure
the books are "in balance" total debits and credits are equal.
47. Balance Sheet: It is the financial statement, which shows the amount and nature of
business assets, liabilities, and owner's equity as of a specific point in time. It is also
known as a Statement of Financial Position or a Statement of Financial Condition.

You might also like