BASIC ACCOUNTING TERMSBy: Prof. Bhavik R. Shah[M.Com ; M.Ed] 98 98 46 21 48

BUSINESS TRANSACTIONS Business Transactions means exchangeOf value for value (In Goods or Services against money)Measured in terms of moneyRelevant to the businessBetween to or more persons or firms For an event to be a business transactionMust possess the quality of economic substanceRelated to business andAffect the economic result andMust be capable of being measured in monetary terms There are mainly TWO types of transactionsCash transactions, which includes exchange of cash &Credit transactions, in which the payment of cash is promised to some future date.

CAPITALBusiness and its owner are separate personsThe value of cash, goods or assets brought in the business by the owner is known as capital.Capital shows the investment made by the owner.Capital means excess of business assets over liabilities.Capital = Total Assets Total liabilities (External)Net Assets = Total Assets Total liabilities (External)Net Worth = Total Assets Total liabilities (External)Note: In capital transaction, Owner is given of value to the business.

DRAWINGSBusiness and its owner are separate personsThe value of cash, goods or assets withdrawn by the owner of the business is known as drawings.Drawings shows the decrease [reduction] in capital.

Note: In Drawings Transactions, Owner is Receiver of value From the business.

LIABILITIESAny amount payable by the businessTo any outsider (other then owner) is known as liability.How Created?By purchasing goods on credit, the amount becomes payable or liability is created.Liability is created by borrowing funds.Liability is created by borrowing services.There are TWO types of Liabilities:Current liability [Amount payable within 1 Year ]Long-term liability [Amount payable after 1 year]

ASSETSAssets are ItemsHaving realizable valueUsed by the business for its operations andOwned by the business

Examples: Cash, land, Building, Machinery, Stock of goods, Furniture, Goodwill, Patent, Copyright, trademark, Etc. are included in assets.

Assets are classified into THREE types:Fixed Assets:Land, Building, Machinery, Furniture, Goodwill, Patent, Copyright, Trademark etc. which can be used for a long period are known as fixed assets.Current Assets:Stock of goods, cash balance, Bank Balance, tools etc keep on changing with the transactions of the business, hence, they are known as current assets.Fictitious Assets:Certain expenses, the benefit of which is available for more then one year, are not written off in one year but are known as fictitious assets.

Preliminary expenses, discount on debentures, advertisement campaign expenses, etc. are examples of fictitious assets.

Other classification of Assets is:Tangible assets land, Building, Machinery, Furniture, etc. which can be seen, touched, are known as tangible assets.Intangible assetsAssets like goodwill, patent, copyright, trademark are valuable but cannot be seen or touched, therefore, they are known as intangible assets.

REVENUERevenue is the amount that business earnsBy selling its products.By providing services to customers.Revenues are the titled as Sales RevenueFeesCommissionInterestDividendsRoyalties ReceivedRent ReceivedRevenue is recognizedWhen the goods or services are sold to the customer for cash* In credit sales also, though the amount is yet to be received revenue is recognized.For interest, Discount, Royalties, Rent, Commission Etc.* When they are due or accrued.

EXPENDITUREExpenditure is the amount ofResources ConsumedFor any benefit or servicesResources are consumedAmount spent or paid orWhen the liability is createdExamples:Machinery PurchasedSalary PaidWages PaidFurniture Purchased

EXPENSESThese are the cost incurred by a business in the process of earning revenues.Generally expenses are measured byThe cost of assets consumed ORThe cost of goods consumedServices usedDuring the accounting periodExamples:Depreciation, Rent paid, Wages, Salary, Interest, Cost of Heat, Light, Telephone Etc.If the benefit of Expenses is available to the business for more than one year is known as prepaid expenses.

INCOMEIncome is the increase in the net worth of the organization either from business activity or other activities.Income is a comprehensive term, which includes profit also.Profit occurs:On sale of Goods and ServicesOn sale of Business AssetsIncome is classified intoRevenue Income:Income received from the day to day transaction of the business is known as revenue income.Capital Income:The income received on sale of any assets or on receipt of any long-term debt is known as capital income.In accounting, income is the positive change in the wealth of the firm over a period of time.

LOSS & GAINLOSS:Amount lost without getting any benefit is known as loss. For Example: Loss due to fire is a loss.Excess of revenue expenses over revenue income is known as loss.Results in decrease in owners capital or net assets or net worth over a period of 1 year is known as loss.

GAIN:Gain or Profit is the excess of revenues over expenses during an accounting year.Results in increase in Owners capital or net assets or net worth over a period of 1 year is known as Gain Or Profit.

PURCHASESThe items, in which the trader is trading are called goods.

Goods received by the trader for cash or on credit are known as purchases.

In a trading concern, purchases are made for resale with or without processing.

In a manufacturing concern, Raw materials are purchased, processed further into finished goods and then sold.

SALES:Goods given by the trader for cash or on credit to the customer are known as sales.

STOCK:Goods;Remaining unsoldOn handAt the end of the accounting periodIs known as STOCK OF GOODSStock is,Cost of Goods Purchased LESSCost of Sold out of the PurchasesThis stock is known as closing stockWhich becomes opening stock in the next year.

DEBTORS:Are Persons and other entitiesKnown as debtors or customers of the business.To whom the goods or services are sold on credit andThe amount receivable.

RECEIVABLES:Amount receivable from any person other than the debtors are known as receivables.For Examples:Pre-paid expensesIncome due but not receivedOutstanding income are known as receivables.

CREDITORS:Are Persons and other entitiesKnown as creditors or suppliers of the business.From whom the goods or services are purchased on credit andThe amount is payable.

PAYABLE:Amount payable to any person other than the creditors are known as payables.For Examples:Outstanding expensesIncome received in advance are known as payables.

DEBIT:To debit means recording an amount on the debit side (Left-hand side) of a ledger account. The name of account credited should be written in the column of particulars.

CREDIT:To credit means recording an amount on the credit side (Right hand side) of a ledger account.The name of account debited should be written in the column of particulars.

Methods or Systems of AccountingThere are TWO methods of accounting:Double Entry Accounting System As the name suggests, in book-keeping, each transaction is given 2 (Double) effects (i) Debit Effects & (ii) Credit Effect. The amount debited is equal to the amount credited. This method is used in many countries of the world including India, as it is the scientific method of accounting.Deshi Nama Accounting SystemThis book-keeping system, which was used in the ancient times is still prevalent. This is similar to, double entry system but it is structurally different from double entry system. In this system, one book is Rojmel, which satisfies the requirement of cash book and journal and the other book is khatabahi (Ledger). This system is also known as "Bahi Khata system.