Basic of Accounting terms

Capital

Amount Invested in an enterprise by proprietor in case of proprietorship or by partners in case of partnership business and shareholder in case of Company. It is a liability of the business towards the proprietor or partners of business.

Why Capital is Liability?

Because under “Business Entity Concept” Business is a separate and distinct entity from its owner. Transaction is recorded in books from point of view of business.

Capital or Owner Equity or Net Worth based in accounting formula

Capital = Assets - Liabilities

Account

An account is the systematic presentation or record of all the transaction related to a particular head of account. It is record of transaction under a particular head of account. It shows the amount of transaction and also their effect and direction.

Dr. Cr.
Date	Particulars	J.F.	Amount	Date	Particulars	J.F.	Amount
2023				2023
1^st April	To Capital		1,00,000	30^th April	By Balance c/d		1,00,000
			1,00,000				1,00,000
1^st May	To Balance b/d		1,00,000

Liabilities

Amount payable owed by the business. Any kind of financial obligation that a business has to pay at the end of an accounting period to a person or a business.

Types of Liabilities

Internal liabilities – liability towards the owner of business.
External liabilities – liability towards the outsiders other than owner. External liability arises because of credit transaction or loans taken. For example – Creditors, Bank overdraft, long-term borrowing etc.

a. Non-current liability – that liability which is payable after a period of more than a year from the end of accounting period. For example, long term loans, debentures etc.

b. Current liability – that liability which is payable within 12 months from the end of the accounting period. For example – creditors, bills payable, short-term loan etc.

Assets

Assets are anything that has current or future economic value to a business. Assets are the properties whether it is tangible or intangible in nature owned by an enterprise. Assets are economic resource that will enable the form to get economic benefits in future. For example – land, building, machinery, furniture, stock, debtors, cash and bank balance, goodwill, copyright, trademark etc.

Assets are three types

1. Non-current assets – those assets which are held by an enterprise not with the purpose to resell but are held either as investment or to facilitate business operation. Those assets which are held by business from a long-term point of view. For example – fixed assets, non-current investment etc.

a. Fixed assets – those non-current assets of an enterprise which are held not to resell but with the purpose to increase its earning capacity. Fixed assets are two types

i. Tangible assets – those assets which have physical existence which can be seen or touched. For example – land, building, machinery, computer etc.

ii. Intangible assets - those assets which do not have physical existence which can not be seen or touched. For example – patent, goodwill, trademark, computer software etc.

2. Current assets – those assets which are held by an enterprise with the purpose of converting them into cash within a short period i.e., 1 year for example – goods, debtors, prepaid expense etc.

a. Prepaid expense – current assets cannot convert into cash but are current assets because a part of the benefit from such expenses is available in next accounting year.

3. Fictitious assets – those assets which are neither tangible assets nor intangible assets. They are the losses or expense not written off in the year in which they are incurred but in more than one (1) accounting period. For example – Advertising expenditure, discount or loss on issue of debenture.

Drawing

Amount withdrawn or goods taken by the proprietor or partner for personal use. Drawing reduces the investment or capital of the owners. Drawing is debited to drawing account (personal account). In balance sheet, drawing is debited from capital of the proprietor or partner.

Receipts

Amount received or receivables for selling assets, goods or services. Two types of receipts

1. Revenue receipts – amount received or receivable in normal course of business say against sale of goods or rendering of services etc.

2. Capital receipts – amount received or receivable against transaction which are not revenue in nature. Shown in balance sheet. For example – sale of machinery, building etc.

Expenditure

Amount spent or liability incurred for acquiring assets, goods or services. Three types of expenditure

1. Capital expenditure – expenditure incurred to acquired assets or improving the existing assets which will increase the earning capacity of business. Capital expenditure is shown on asset side of balance sheet of entity. For example – purchase of machinery to manufacturing goods, purchase of computer to carry on business.

2. Revenue expenditure – direct relationship with revenue. Expenditure incurred the benefit of which is consumed or exhausted within accounting period. It is shown in debit side of trading account or profit & loss account. For example – salaries, rent, electricity expenses etc.

3. Deferred revenue expenditure – is a revenue expenditure but is written off or charged in more than one accounting period because it is estimated that benefits of such expenditure will accrued in more than one financial year. For example – large advertising expenditure that will give benefit for more than one accounting period.

Trade Receivable

Amount receivable foe sale of goods or services rendered in ordinary course of business. Amount due from customers of the enterprises.

Trade Receivable = Debtor + Bill Receivable

· Debtor – person or entity who owes amount to the enterprise against credit sales of goods or services rendered.

· Bill receivable – bill of exchange accepted by debtor, amount of which will be received on specified date such as bill of exchange a written order to pay a sum of money to a particular person on a particular date.

Trade payable

Amount payable for purchase of goods or services taken in ordinary course of business. Amount due to seller of goods by enterprise.

Trade Payable = Creditor + Bill payable

· Creditor – person or enterprise to whom an enterprise owes amount against credit purchase of goods or services taken.

· Bills payable – it means a bill of exchange accepted by person or enterprise the amount of which will be payable on specified date.

Expense

Cost incurred for generating revenue. It shown on the debit side of trading account and profit & loss account. For example – Salaries, rent, depreciation, bad debts etc.

1. Prepaid Expense – expense that has been paid in advance and the befit of which will be available in the following year or years for examples – Insurance premium of 60,000 paid for 1 year beginning 1^st oct 2023 financial year ends on 31^st march 2024 means premium for 6 months (1^st April 2024 to 30^th sept 2024) amounting 30,000 is paid in advance amount (30,000) is prepaid expense. In balance sheet as 31^st march 20224 it will shown as current assets.

2. Outstanding Expense – expense that has been incurred but has not been paid. For example – outstanding rent. Debited to profit & loss account also shown under the head current liability in the balance sheet.

Income

Profit vs income

Income is a broader term than the term ‘profit’. Income includes profit from activities other than its operative activities. For example – good costing 25,000 are sold for 31,000 the cost of good sold i.e., 25,000 is expense the sale of goods i.e. 31,000 is revenue and the difference 6,000 is income.

Profit

Income earned by the business from its operating activities. For example – profit earned from sales of goods or rendering of services. Profits are two types

1. Gross profit – revenue from sales of goods or service rendered – direct cost. It shown in trading account.

2. Net profit – total revenue – total expense. It shown in profit & loss account.

Revenue from operations

Revenue earned by an enterprise or firm or company from its operating activities company’s routine, core business. For example – sales of goods (Net Sales – Sales return). Sales of service, financial enterprise – interest earned, dividend received etc.

Stock or Inventory

Is a tangible asset held by an enterprise for the purpose of sale in the ordinary course of business for purpose of using it in the production of goods meant for sale. It is shown in balance sheet as current assets. It is valued on the basis of “cost / net realizable value (market price) whichever is lower” principle.

Types of stocks

1. Stock or inventory of raw material - Raw material used for manufacturing of goods. For example, furniture factory like woolen planks.

2. Work in progress - Stock that is in the process of being finished. It partly finished goods.

3. Stock or inventory of finished goods, for trading concern stock or inventory remaining unsold. For manufacturing concern, goods manufactured for the purpose of sale.

Discount

Reduction in price of goods to be paid to a customer by enterprise. Two types of discounts

1. Trade Discount – reduction in prices by seller to purchaser of goods when they buy goods of certain quantity or value

a. Net sale = sale – trade discount

b. Net purchase = purchase – trade discount

2. Cash Discount – discount allowed for timely payment of due amount.

Bad Debts

It is amount of debt in a business that becomes irrecoverable due to the inability of a customer to repay the debt

1. Loss to business

2. Debited to profit & loss account

Solvent and Insolvent

1. Insolvent – person or enterprise which is not in a position to pay its debts.

2. Solvent – person or enterprise which is in a position to pay its debts.

Debit and Credit

An account has two parts i.e. debit and credit.

Left side is the debit side while the right side is the credit side. If an account is to be debited, then the entry is posted to the debit side of an account. It is said that the account is debited. It is derived from Latin word ‘Debito’

Dr. Cr.
Date	Particulars	J.F.	Amount	Date	Particulars	J.F.	Amount
2023				2023
1^st April	To Capital		1,00,000	30^th April	By Balance c/d		1,00,000
			1,00,000				1,00,000
1^st May	To Balance b/d		1,00,000

Depreciation

Is a fall in the value of an asset because of usage or with passage of time or obsolescence or accident. Use the method used to reallocate, or “write down” the cost of a tangible asset such as equipment over its useful life span.

Voucher

Is an evidence of a business transaction. For example – cash memo. Invoice or bill, receipts etc.