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Important Definitions

The document provides an overview of accounting, defining it as the process of identifying, measuring, recording, and communicating economic transactions. It explains key concepts such as assets, liabilities, owner’s equity, and the fundamental accounting equation, along with the differences between current and fixed assets. Additionally, it outlines the steps of the accounting cycle and the types of books used in accounting.

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subooralam940
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8 views

Important Definitions

The document provides an overview of accounting, defining it as the process of identifying, measuring, recording, and communicating economic transactions. It explains key concepts such as assets, liabilities, owner’s equity, and the fundamental accounting equation, along with the differences between current and fixed assets. Additionally, it outlines the steps of the accounting cycle and the types of books used in accounting.

Uploaded by

subooralam940
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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IMPORTANT DEFINITIONS

Accounting
Accounting is the process of identifying, measuring, recording and communicating economic transactions.
Measurement is normally made in monetary terms and accountant will prepare records in the form of
financial statements, such as income statement and balance sheet.

OR
Accounting is the art of recording, classifying, and summarizing in a significant manner and in monetary terms,
transactions, and events which are in the part at least of a financial character and interpreting the result
thereof.

Head of Accounts Increases Decreases


Assets Recorded as Debit Recorded as Credit
Liabilities Recorded as Credit Recorded as Debit
Owner’s Equity Recorded as Credit Recorded as Debit
Revenue & Income Recorded as Credit Recorded as Debit
Expenses Recorded as Debit Recorded as Credit
Rules of Debit and Credit

Fundamental Accounting Equation


Assets = Liabilities + Owner’s equity

Assets
An asset is a resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity.
An asset generally is something that the business owns and holds the legal title to.

Current Assets
An asset is a resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity within the next 12 months.
Examples are:
Cash, bank, merchandise inventory, accounts receivable.

Non-Current/Fixed Assets
An asset is a resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity for more than 12 months.
Examples are:
Equipment, furniture, office building, vehicle.

Expenses
Expenses means the amount spend by the business for running the business operations. The expenses are also
known as Revenue Expenditure. In other words, the amount spends on running the process of production and
purchase of goods.

Liabilities
A liability is a present obligation of the entity arising of past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits
Liabilities are debts and obligation of the business.

Revenue
Gross inflow of consideration (cash / receivable) arising in the course of ordinary activities from Sale of Goods
and Rendering of Services.

Capital
Owner’s equity is the portion of a company’s assets that an owner can claim; it’s what’s left after subtracting a
company’s liabilities from its assets. Owner’s equity grows when an owner increases their investment or the
company increases its profits.

Difference between Current Assets and Fixed Assets


Current Assets Fixed Assets
1. Current assets are those assets 1. Fixed assets are long term assets
which are kept for being traded or which are held by a business for
resale. continuing use.
2. It is readily convertible into 2. It is not easily convertible into
cash. cash.
3. Holding period is less than 12 3. Holding period is more than
months. 12 months.
4. Examples: cash, bank, account 4. Furniture, building, vehicle, office
receivables. equipment.

Steps of Accounting Cycle


 Journal Entries
The transaction is recorded in journal as a debit and credit.
 Post to Ledger
The journal entries are transferred to the appropriate T- accounts in general ledger.
 Trail Balance
A trail balance is calculated to verify that the sum of debits is equal to the sum of credits.
 Adjusting Entries
Adjusting entries are made for accrued and differed items. The entries are journalized and posted to the
T- accounts in the general ledger.
 Adjusted Trail Balance
A new trail balance is calculated after making the adjusting entries.
 Financial Statements
Income statement, balance sheet and cash flow statements are prepared.
 Closing Entries
Transfer the balance of temporary accounts to owner’s equity account.
 After-Closing Trail Balance
A final trail balance is calculated after the closing entries made.
 Reversing Entries
Reverse the necessary adjusting entries (optional).

Books
i. Books of Original Entry
 Sales day book.
 Sales return day book.
 Purchase day book.
 Purchase return day book.
 Cash book.
 Petty cash book.
 Journals.
ii. Books of Final Entry
 Income statement.
 Balance sheet.
 Cash flow statement.
iii. Statements
 Income statement.
 Statement of financial position (Balance sheet)
 Cash flow statement.
 Statement of retained earnings.
 Statement of changes in equity.
 Bank reconciliation statement.

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