Accounting Terminology

Accounting Terminology
• Transaction:
– “An event the recognition of which gives rise to an entry in
accounting records.
– Cash transaction
– Credit transaction
• Debtor:
– A person who owes money to the firm mostly on account
of credit sales of goods is called a debtor.
– For example, when goods are sold to a person on credit
that person pays the price in future, he is called a debtor
because he owes the amount to the firm.
 Accounting Terminology
• Creditor
– A person to whom money is owing by the firm is called
creditor.
– Ram is a creditor of the firm when goods are purchased on
credit from him.
• Capital
– It means the amount which the proprietor has invested in the
firm or can claim from the firm.
– It is also known as owner’s equity or net worth. Owner’s
equity means owner’s claim against the assets.
– It will always be equal to assets less liabilities
 Accounting Terminology
• Liability
– It means the amount which the firm owes to outsiders
that is, excepting the proprietors.
– In the words of Finny and Miller, “Liabilities are debts;
they are amounts owed to creditors; thus the claims of
those who ate not owners are called liabilities”.
– In simple terms, debts repayable to outsiders by the
business are known as liabilities.
 Accounting Terminology
• Asset
– Any physical thing or right owned that has a money value
is an asset.
– In other words, an asset is that expenditure which results
in acquiring of some property or benefits of a lasting
nature.
• Goods
– It is a general term used for the articles in which the
business deals; that is, only those articles which are
bought for resale for profit are known as Goods.
 Accounting Terminology
• Revenue
– It means the amount which, as a result of operations, is
added to the capital.
– It is defined as the inflow of assets which result in an
increase in the owner’s equity.
– It includes all incomes like sales receipts, interest,
commission, brokerage etc.,
– However, receipts of capital nature like additional capital,
sale of assets etc., are not a part of revenue.
 Accounting Terminology
• Expense
– The terms ‘expense’ refers to the amount incurred in the
process of earning revenue.
– If the benefit of an expenditure is limited to one year, it is
treated as an expense (also know is as revenue
expenditure) such as payment of salaries and rent.
 Accounting Terminology
• Purchases
– Buying of goods by the trader for selling them to his
customers is known as purchases.
– As the trade is buying and selling of commodities purchase
is the main function of a trade.
– Here, the trader gets possession of the goods which are not
for own use but for resale.
– Cash purchases and credit purchases
– If cash is paid immediately for the purchase, it is cash
purchases, If the payment is postponed, it is credit
purchases.
 Accounting Terminology
• Sales
– When the goods purchased are sold out, it is known as
sales.
– Here, the possession and the ownership right over the
goods are transferred to the buyer.
– It is known as. 'Business Turnover’ or sales proceeds.
– Cash sales and credit sales
– If the sale is for immediate cash payment, it is cash sales. If
payment for sales is postponed, it is credit sales.
 Accounting Terminology
• Stock
– The goods purchased are for selling, if the goods are not sold out
fully, a part of the total goods purchased is kept with the trader
unlit it is sold out, it is said to be a stock.
– If there is stock at the end of the accounting year, it is said to be a
closing stock.
– This closing stock at the year end will be the opening stock for the
subsequent year.
• Drawings
– It is the amount of money or the value of goods which the
proprietor takes for his domestic or personal use.
– It is usually subtracted from capital.
 Accounting Terminology
• Losses
– Loss really means something against which the firm receives no
benefit.
– It represents money given up without any return.
– It may be noted that expense leads to revenue but losses do
not. (e.g.) loss due to fire, theft and damages payable to others
• Account
– It is a statement of the various dealings which occur between a
customer and the firm.
– A person or a firm or a property (or assets) or a liability or an
expense or an income.
 Accounting Terminology
• Invoice
– While making a sale, the seller prepares a statement giving
the particulars such as the quantity, price per unit, the total
amount payable, any deductions made and shows the net
amount payable by the buyer.
– Such a statement is called an invoice.
• Voucher
– A voucher is a written document in support of a transaction.
– It is a proof that a particular transaction has taken place for
the value stated in the voucher.
– Voucher is necessary to audit the accounts.
 Accounting Terminology
• Proprietor
• Discount
– When some discount is allowed in prices of goods on the
basis of sales of the items, that is termed as trade
discount,
– When debtors are allowed some discount in prices of the
goods for quick payment, that is termed as cash discount.
 JOURNAL
• When the business transactions take place, the first step is to
record the same in the books of original entry or supplementary
books or books of prime or journal.

• Thus journal is a simple book of accounts in which all the business

transactions are originally recorded in chronological order and
from which they are posted to the ledger accounts at any
convenient time.

• Journalsing refers to the act of recording each transaction in the

journal and the form in which it is recorded, is known as a journal
entry.
 JOURNAL
Advantages of Journal
• Date wise record can easily be maintained
• All the necessary information and the required explanations
regarding all transactions can be obtained from the journal
• Errors can be easily located and prevented by the use of
journal or book of prime entry
• The journal has five columns, viz.
– (1) Date; (2) Particulars; (3) Ledger Folio; (4) Amount (Debit); and (5)
Amount (Credit) and a brief explanation of the transaction by way of
narration is given after passing the journal entry.
 JOURNAL
• 1. Sales Day Book- to record all credit sales.
• 2. Purchases Day Book- to record all credit
purchases.
• 3. Cash Book- to record all cash transactions of
receipts as well as payments.
• 4. Sales Returns Day Book- to record the return of
goods sold to customers on credit.
• 5. Purchases Returns Day Book- to record the return
of goods purchased from suppliers on credit.
 JOURNAL
• 6. Bills Receivable Book- to record the details of all
the bills received.
• 7. Bills Payable Book- to record the details of all the
bills accepted.
• 8. Journal Proper-to record all residual transactions
which do not find place in any of the aforementioned
books of original entry.
 LEDGER
• Ledger is a main book of account in which various
accounts of personal, real and nominal nature, are
opened and maintained.

• A ledger account may be defined as a summary

statement of all the transactions relating to a person,
asset, expense, or income or gain or loss which have
taken place during a specified period and shows their
net effect ultimately.
 LEDGER
Ruling of ledger account
• Type- 1

• Type- 2
 LEDGER
• Usually, the following three types of ledgers are
maintained in such big business concerns.
– (i) Debtors’ Ledger:
• It contains accounts of all customers to whom goods
have been sold on credit. From the Sales Day Book, Sales
Returns Book and Cash Book, the entries are made in this
ledger. This ledger is also known as sales ledger.
 LEDGER
• (ii) Creditors’ Ledger:
– It contains accounts of all suppliers from whom goods have
been bought on credit. From the Purchases Day Book,
Purchases Returns Book and Cash Book, the entries are
made in this ledger. This ledger is also known as Purchase
Ledger.

• (iii) General Ledger:

– It contains all the residual accounts of real and nominal nature.
It is also known as Nominal Ledger.
 JOURNAL
Journalise the following transactions for 2014
• June 1 Purchased goods worth Rs.300 from Vinay and Rs.500
from Keshav on credit.
• June 3 Sale of goods worth Rs.1,000 to Balram and Rs.700 to
Dhanram.
• June 5 Cash of Rs.900 received from Ramasamy and Rs.800
from Krishnasamy.
• June 7 Paid Rs.800 to Pradeep and Rs.500 to kuldeep.
• June 9 Withdrawn from bank Rs.600 for office use and Rs.300
for personal use.
 JOURNAL
Date Particular L.F. Dr. Cr.
Rs. Rs.
1998 June 1 Purchases A/c 800
Dr. 300
To Vimal’s A/ c 500
To Kamal’s A/c
(Purchased goods from Vinay and Keshav
on credit)
1998 June 3 Balram’s A/c 1,000
Dr. 700 1,700
Dhanram A/c
Dr.
To Sales A/c
(Sales of goods to Balram and Dhanram)
1998 June 5 Cash A/c 1,700
Dr. 900
To Ramasamy’s A/c 800
 JOURNAL
Date Particular L.F Dr. Cr.
. Rs. Rs.
1998 June 7 Pradeep’s A/c Dr. 800
Kuldeep’s A/c Dr. 500 1,300
To Cash A/c
(Paid Pradeep and Kuldeep )
1998 June 9 Cash A/c 600
Dr. 300 900
Drawings A/c Dr.
To Bank A/c
(Withdrawn from bank for office use and
personal use)
 LEDGER
Post the following transactions in relevant ledger account
and balance the same for year 2015.

•Example
 Balance Sheet
• The Balance sheet comprises of lists of assets,
liabilities and capital fund on a given date.
• Balance sheet may be called a ‘statement of equality’
in which equality is established by representing
values of assets on one side and values of liabilities
and owners' funds on the other side.
 Balance Sheet
• “Balance sheet is a ‘Classified summary’ of the ledger
balances remaining after closing all revenue items
into the profit and loss account.” - Cropper.

• “Balance sheet is a screen picture of the financial

position of a going business concern at a certain
moment” - Francis.
 Classification of Assets and
Liabilities
• Assets: Assets are properties of business.
• Classified on the basis of its nature.
• (i) Fixed assets: acquired and held permanently
• (ii) Current assets: cash, debtors bank balances, bill
receivable and stock
• (iii) Tangible assets: Tangible assets have definite
physical shape or identity and existence; they can be
seen, felt and have volume
– Both fixed and current assets
 Classification of Assets and
Liabilities
• (iv) Intangible assets: The assets which have no physical
shape which cannot be seen or felt but have value are
called intangible assets.
– Goodwill, patents, trade marks and licences are examples of
intangible assets.
• They are usually classified under fixed assets.
• (v) Fictitious assets: Fictitious assets are not real assets.
• Past accumulated losses or expenses which are
capitalized for the time being, expenses for promotion
of organisations, discount on issue of shares, etc.
 Classification of Assets and
Liabilities
• (vi) Wasting assets: These assets are also called
depleting assets.
– Assets such as mines, Timber forests, etc. which become
exhausted in value by way of excavation of the minerals,
cutting of wood etc. are known as wasting assets.
• Such assets are usually natural resources with
physical limitations.
 Classification of Assets and
Liabilities
• (vii) Contingent assets: Contingent assets are assets,
the existence, value possession of which is based on
happening or otherwise of specific events.
– For example, if a business firm has filed a suit for a
particular property now in possession of other persons,
the firm will get the property if the suit is decided in its
favour.
– Till the suit is decided, it is a contingent asset.
 Classification of Assets and
Liabilities
• Liabilities: A liability is an amount which a business
firm is ‘liable to pay’ legally.
• All the amounts which are claims by outsiders on the
assets of the business are known as liabilities.
• They are credit balances in the ledger.
 Classification of Assets and
Liabilities
• (1) Owner's capital: Capital is the amount contributed by
the owners of the business.
• In addition to initial capital introduced, proprietors may
introduce additional capital and withdraw some amounts
from business over a period of time.
– Owner’s capital is also called ‘net worth’.
– It is the total fund of proprietors on a particulars date.
– It consists of capital, profits and interest on capital subject to
reduction of drawings and interest on drawings.
• In case of limited companies, capital refers to capital
subscribed by shareholders. Net worth refers to paid up
equity capital plus reserves and profits, minus losses.
 Classification of Assets and
Liabilities
• (2) Long term Liabilities: Liabilities repayable after
specific duration of long period of time are called long
term liabilities.
– Examples are long term loans and debentures.
• (3) Current liabilities: Liabilities which are repayable
during the operating cycle of business, usually within a
year, are called short term liabilities or current liabilities.
– Examples of current liabilities are trade creditors, bills payable,
outstanding expenses, bank overdraft, taxes payable and
dividends payable.
 Classification of Assets and
Liabilities
• (4) Contingent liabilities: Contingent liabilities will result
into liabilities only if certain events happen.
– Examples are: Bills discounted and endorsed which may be
dishonored, unpaid calls on investments.
• Balance Sheet Equation:
• An important thing to note about the Balance Sheet is that, the
total value of the assets is always equal to the total value of the
liabilities.
Assets = Liabilities + Capital + Profits – Losses - Expenses
OR
Capital = Prop. Fund + Liabilities
PROFORMA OF BALANCE SHEET
In the balance sheet , debits are assets and credits are liabilities and capital
 From the following adjustment Trial Balance, Prepare Balance
Sheet of Saravanan Traders as at 31st March 2010
  Dr. (Rs) Cr. (Rs)
Capital   250000
Cash in hand 40000  
Cash at bank 30000  
Closing stock 20000  
Fixed assets less depreciation (Rs.20,000) 180000  
Bills Receivable 21000  
Bills Payable   2000
Sundry debtors 52000  
Sundry creditors   25000
Liabilities for expenses   10000
Drawings 12000  
Investments 15000  
P&L A/c   70000
Bank overdraft   13000
  370000 370000
 Saravanan Traders
Balance Sheet as on 31st March 2010
Liabilities Rs. Assets Rs.

Fixed assets less

Capital ======>250000 180000
depreciation (Rs.20,000)

Add: Net Profit ===>70000 Investments 15000

320000 Closing stock 20000
Less: Drawings ===>12000 Sundry debtors 52000
308000 Bills Receivable 21000
Bills Payable 2000 Cash in hand 40000
Sundry creditors 25000 Cash at bank 30000
Liabilities for expenses 10000
Bank overdraft 13000
358000 358000