BASIC ACCOUNTING TERM

Assets: Anything which is in the possession or is the property of a business enterprise

including the amounts due to it from others is called an asset. “Assets are valuable resources
owned by a business which are acquired at a measurable money cost.”

In other words, anything which will enable a business enterprise to get cash or a benefit in
future is an asset. Thus, Cash and Bank balances, Stock, Furniture, Machinery, Land and
Building, Bills Receivable, Money owning by debtors etc. are all assets.

Features of assets-

(1) Assets are valuable resources.

(2) They are owned by the business.
(3) These are acquired at a money cost.
(4) It may have tangible or intangible form.

Fixed Assets: Fixed Assets refer to those assets which are held for continued use in the
business for the purpose of producing goods or services and are not meant for resale. Examples
of Fixed Assets are: Land and Building, Plant and Machinery, Motor Vehicles, Furniture etc.

Current Assets: Current Assets are those assets which are meant for sale or which the
management would want to convert into cash within one year. As such, these assets are also
termed as ‘Short-lived or active assets’. they includes cash, bank balance, debtors, bills
receivables, stock, short term investments. prepaid expenses etc.

Liquid assets- Liquid assets are those assets which are available to business entity either in
the form of cash which are likely to be converted into cash within a very short period. examples
of liquid assets are cash, cash at bank, bills receivable, debtors, short terms
investments\marketable securities, etc. in short, liquid assets are current assets except stock
and prepaid expenses.

Fictitious Assets- Fictitious Assets are neither tangible assets nor intangible assets. these are
never realized in cash though sometimes. future benefits can be taken from these assets. They
include debit balance of profit & loss a/c. deferred. Revenue expenditure (advertisement
campaign).
Tangible and Intangible Assets: Tangible Assets are those assets which can be seen or
touched. In other words, which have a physical existence such as Land, Building, Plant,
Furniture, Stock, Cash etc. Intangible assets are those assets which do not have a physical
existence and which cannot be seen or felt. Examples of such assets are Goodwill, Patents,
Trademarks and Prepaid expenses.

Wasting Assets: Wasting Assets are those assets which are consumed through being worked
or used, such as mines. As soon as all the minerals have been extracted, the mine becomes
valueless.

Liability: It refers to the amount which the firm owes to outsiders {excepting the amount owed
to proprietors.} Liabilities may be classified into two parts, namely-internal and external.

Internal liability-The amount due by business entity to proprietor or owners is called internal
liability. it is represented by owner’s capital and free reserves.

External liability-The amount due to outsiders (except proprietor or owners) by the firm is
called external liability. it includes creditors, bills payable, bank loan, expenses outstanding, etc.
External Liabilities may be classified into two parts, namely-Long Term and Current Liability .

Long term Liabilities or fixed Liabilities: These refers to those liabilities which fall due for
payment in a relatively long period {normally after more than one year}. For example, long Term
Loans and Debentures etc.

Current Liabilities: Current Liabilities refer to those liabilities which are to be paid in near
future {normally within one year}. For Example, Bank Overdraft, Bills Payable, Creditors,
Outstanding Expenses and Short Term Loans etc.

Capital: It refers to the amount invested by the proprietor in a business enterprise. It is the
amount with the help of which goods and assets are purchased in the business.it is a liability of
the business entity to its owner. It is also termed as internal liability, owner’s equity, proprietor’ s
fund or networth.Capital is also known as Owner’s Equity or Net Worth or Net Assets.

Receipts- the amount received or receivable from selling of assets, goods or services is called
a receipt. receipts may either be capital receipts or revenue receipts.

Capital receipts- the amount received by business entity from proprietor or partners as
capitals or money received by way of issue of share capital\debentures or by raising loan is a
capital receipts. similarly, the money received or receivable by the business entity by sale of
fixed assets like land building.
Revenue receipts- Revenue receipt refers to amount received or receivable by the business
entity on recurring (regular) basis from the operation of its business e.g, amount received from
sale of goods or services, commission, rent, interest, dividend, royalties, etc. amount received
from sales of goods or services is called sales revenue.

Expenses: Expense is the cost incurred in producing and selling the goods and services.
According to Finney and Miller,” Expense is the cost of use of things or services for the purpose
of generating revenue”.

Following are included in the term expenses:Cost of Goods Sold.Amount paid for rent,
Commission, Salary, Advertisement etc.

Income:’ Income’ is different from ‘revenue’. Amount received from sale of goods is called
‘Revenue’ and the cost of goods sold is called ‘Expense’. Surplus of revenue over expenses is
called ‘Income’.income is the amount of profit earned during an accounting period.

Expenditure: Any disbursement of cash or transfer of property or incurring a liability for the
purpose of acquiring assets, goods or service is called expenditure. It means that any type of
payment for the receipt of benefits is termed as expenditure.

Capital expenditure-Any expenditure which is incurred in acquiring or increasing the value of

a fixed asset is termed as capital expenditure. Such expenditure yields benefit over a long period
and hence written in assets.

Revenue expenditure-Any expenditure, the full benefits of which is received during one
accounting period is termed as revenue expenditure. Such expenditure does not result in an
increase in the earning capacity of the business but only helps in maintaining the exiting earning
capacity.

Revenue-Revenue in accounting means the income of a recurring (regular) nature from any
source. It consists of the amount received from sale of goods any from service provided to
customers.

Profit- The excess of revenue over total expenses (costs) of a business entity for an accounting
period is termed as profit. profit may either be :

Gross profit- The difference between sales revenue and the cost of goods of sold or services
rendered is called as ”gross profit”.
Net profit-If all operating expenses (administrative, selling and financial) and other non
operating expenses are deducted from the gross profit and other income, if any are added, it is
called net profit.

Debtors- The term debtors represents those persons of firms to whom goods have been sold or
services rendered on credit and payment has not been received from them. They still owe some
amount to the business.

Bills receivable- A bill of exchange is written by the seller of goods on the buyer of goods
directing to pay the specified amount at a future date. A bill of exchange becomes bill receivable
for the seller of goods or services (drawer).

Receivables- Amount due from debtors and bills receivable (B/R) is jointly termed as
receivables or account receivable.

Creditors-The term creditor represent those persons or firms from whom goods have been
purchased or services procured on credit and payment has not been made to them. Some money
is still owing to them.

Gain- It is a monetary benefit, profit or advantage resulting from events or transactions which
are incidental to business such as sale of fixed assets, winning a court case or appreciation in
the value as asset.

Types of stock-

Stock of raw material- it includes stock of raw materials purchased for using them in the
product manufactured but still lying unused. For example, the value of cotton in case of cloth
mills is the stock of raw material.

Stock of work-in-progress-it is also termed as stock of partly finished goods. It means goods
in semi-finished from.

Stock of finished goods- it includes the stock of those goods which have been completely
prodessed and are ready for sale but are lying unsold at the end of the accounting period.

Purchases- the terms purchases is used only for the purchase of the goods in which the
business deal. In case of manufacturing concern goods means acquiring of raw material for the
purpose of conversion into finished product and then sale. in case of trading concern goods are
those thing which are purchased for resale.
Voucher- a voucher is a document which provides the authorization to pay and the basis of
which the business transaction are, first of all, recorded in the books of accounts. A separate
voucher is prepared for each transaction and it specifies the accounts to be debited or credited.

Discount- it is a rebate or an allowance given by the seller to the buyer. it is two types.

Trade discount- when discount is allowed by a seller to its customers at a fixed percentage on
the list or catalogue price of the goods it is called trade discount.

Cash discount- when discount is allowed to the customers for making prompt payment it is
called cash discount.

Drawing- Any cash or value of goods withdrawn by the owner for personal use or any private
payments made out of business funds are called drawings..

Distinction between capital expenditure and revenue expenditure

Basis Capital expenditure Revenue expenditure

Meaning Capital expenditures are Revenue expenditures are incurred
incurred for
For acquiring fixed assets like Meeting the day to day operations of
land The business e.g purchase of goods,
Building, machinery, etc. payment
Of Wages salary, rent, etc.
Benefit They yield benefit over a long They yield benefit in the same
Derived period Accounting year.
Of time (several years)
Position They are shown as asset in the They are debited to trading a/c or
in Balance sheet. profit and
Financial Loss a/c as per their nature.
Statement
Purpose They increase the earning They are incurred for the day to day
capacity Maintenance of the business.
Of the business.

Deferred Revenue expenditure-If the benefit of a benefit of a revenue expenditure is likely to

accrue to firm over a period of several years, such Revenue expenditures are termed as deferred
Revenue expenditure e.g. huge amount of money spent on advertisement for launching a new
product in the marked (called as advertisement development or advertisement campaign).