Basic Terms of Accounting

Santosh Parashar Associate Professor- Accounting & Finance IAMR, Ghaziabad

Capital
Amount invested by the proprietors or Owners Financial Holding Value of Net Assets i.e. (Assets-Liabilities)

Capital may be owned capital or borrowed capital

Assets
They are economic resources/properties owned or possessed by

a business. They are acquired by a business that help in earning the revenue.

Types of Assets

Fixed Assets Current Assets Liquid Assets Fictitious Assets Tangible Assets Intangible Assets Wasting assets Contingent Assets

Fixed Assets
Assets held permanently by a business. Assets Which have long life. Help in earning the future expected profits. Examples-Plants, Machinery, Land, Building, Furniture, Fittings, Fixtures,
Vehicles, Loose tools etc.

Current Assets
Assets which can be converted into cash

with in a short period usually a year. They are generally meant for resale. They get changed their form very often. Examples- Cash, Stock of goods,
Bill receivables, Sundry debtors

Liquid Assets
Assets which are either in the form of cash

or can be convertible into cash quickly. ExamplesCash/Bank Balance/Marketable Securities etc.

Fictitious Assets
Assets which are virtually not the assets . They are either expenses incurred at the time of commencement

of business or capital losses in the past which are capitalized. ExamplesDebit Balance of P/L-a/c,
Preliminary Expenses, Discount on issue of shares, Underwriting Commission etc.

Tangible Assets
Assets which have a physical presence. Assets which can be seen and touched. Examples- Cash, Stock of goods, Furniture, Building, Vehicle

Intangible Assets
Assets which can not be seen

and touched. Assets which do not have a physical presence but posses some value. Examples- Goodwill, Copy rights, Trade
Marks, Service Marks, Patent rights etc.

Wasting Assets
Assets

which get exhausted in the course of time. ExamplesNatural resources extracted from Earth, Sea, Quarries, mines, and petroleum oil wells etc.

Contingent Assets
Assets whose existence/value is dependent on the happening or

non-happening of a certain event which is not definite. Future agreements made presently to supply technology which may or may not become a reality. If the technology is supplied to the business it becomes assets.

GOV .

Goodwill
The value of this intangible asset fluctuates over a period of time due to changing conditions & Circumstances. Ex. Popular trade marks, Patents, Exceptionally good contracts, Standard quality, reasonable price, unparallel service, dedicated labor force, Honest management of high integrity, sound financial position, monopoly power/govt. patronage etc.

Copy rights
A right which does not let the others copy of matter of original books/CDs/ new research etc.

Trade Mark
This is a mark , graphics, shape of goods and their packaging or combination of colors etc. which distinguish the goods or services and also give the legal protection to the same.

Liabilities
Amounts owed by the business to the owners/outsiders. They are the obligation/responsibilities of a business to pay the money to outsiders. Short term/Current Liabilities

Long term Liabilities

Which are repayable after a long period of time. Bank loans/Debentures redeemable after 5 to 7 years/capital introduced by the owners.

Which are repayable within a year Generally the position of current assets is strengthened whenever the C.L. are created. Thus to pay the C.L., the C.A. are reduced. Sundry creditors/Bills payable/Bank Overdraft/Outstanding expenses, incomes received in advance etc.

Contingent Liability
Possible future liability which may result of decision of court / sudden failure of operating machinery/ loss or damage of property or manpower etc.

Outstanding Expenses
Expenses that have already been incurred but not paid in that period. Ex.- O/s Salary/O/s Wages

Advance incomes

Incomes received in advance but services shall be rendered in future. Advances from customers, rent received from tenant etc.

Depreciation
Depreciation refers to two very different but related concepts: a) decline in value of assets, and b) allocation of the cost of tangible assets This is a non-cash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence etc.

Transaction Analysis
Business transaction meansDealing between parties Business activity

Exchange of goods for services

Receipt & payment of money

Kinds of Transactions

On the basis of nature Cash transaction (when receipt of cash is not postponed but

immediately transferred ) Credit transaction (when receipt of cash is postponed for future )

On the basis of Scope Internal- any transaction which is concerned with the activity

within the enterprise (like- charging of Depreciation) External- A transaction between business and outside parties.

Barter TransactionsGoods or Services are exchanged without giving consideration to their value.

Exchange TransactionsGoods or services are exchanged but consideration is given to their value.

Goods of

500 are exchanged for furniture of

500.

Transfer Transactions

Transfer of some amount from one account to another.

Hidden Transactions

If goods sold for 1000 in credit and amount of 990 received in full settlement. Thus, 10 will be treated as discount and will be entered the same.

Discount

Allowance allowed by the trader to his customer from saleable goods or from receivable amount of cash.

or

Trade Discount or Functional Discount

Deduction in price given by the wholesaler/manufacturer to the retailer at the list price or catalogue price.

Cash Discount
A reduction in the price of an item for sale allowed if payment is made within a stipulated period.

Drawings
Assets withdrawn from the business by the owners for their personal use. These assets are usually cash but can be any other asset withdrawn.

Entry
Means recording of transactions in the books of accounts.

Creditors & Debtors

A creditor is a party (e.g. person, organization, company, or government) that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property or service. The second party is frequently called a debtor or borrower. The first party is the creditor, which is the lender of property, service or money.

Objective

Revenue/ Income
These are the amounts that the business earns by selling its products or providing services to customers. Other items of revenue common to many businesses are commission, interest, dividends, royalties, rent received etc.

Goods
Articles or items purchased for sales purpose at profit or processing by the business or for use in the manufacturing process as raw material are known as goods. In other words, goods are commodities in which the business deals, for e.g., tables, chairs, desks etc are goods for a firm dealing in furniture. Americans use the term merchandise for goods.

Expenses:
These are the costs incurred by a business in the process of earning revenues. Generally, expenses are the cost of assets consumed or service used during an accounting period. Expenses become assets or cost. Some examples of expenses are -wages, salary, rent, interest, depreciation, telephone charges etc.

Objective
Purchases
These are the total amount of goods procured by a business on credit or for cash for use or for resale. In a trading concern goods are purchased for resale with or without processing whereas in a manufacturing concern, raw materials are purchased, processed further into finished goods, and then sold.

Purchase return & Sales returns

A purchase return occurs when a buyer returns merchandise that it has purchased from a supplier. A Sales return occurs when a seller accepts merchandise that it has sold to a customer.

Objective
Bad and Doubtful Debts
A bad debt is an amount owed to a business or individual that is written off by the creditor as a loss because the debt cannot be collected and all reasonable efforts to collect it have been exhausted.
Doubtful debts are those debts which a business or individual is unlikely to be able to collect. The reasons for potential non-payment can include disputes over supply, delivery, the condition of item or the appearance of financial stress within a customer's operations.