Table of Contents

Basic Accounting Terms – 23 Important terms

Basic Accounting Terms Intro- We’ve compiled a list of the most 23 Common Basic Accounting Terms, along with their abbreviations (where appropriate) and definitions.

 

1. Business

Business is defined as an economic activity involved in the production, sales, transfer, and exchange of goods and services on regular basis, undertaken with the motive of earning a profit, with an element of Risk by satisfying human needs in the society. It should be Lawful. Every business requires some investment in cash or kind or both.

2. Goods

The products in which the business deal. The items that are purchased for the purpose of resale and not for use in the business are called goods.

Goods refer to the products in which the business unit is dealing, i.e. in terms of which it is buying and selling or producing and selling.

The items that are purchased for use in the business are not called goods. For example, for a furniture dealer purchase of chairs and tables is termed as goods, while for others it is furniture and is treated as an asset.

Similarly, for a stationery merchant, stationery is goods, whereas for others it is an item of expense (not purchases)

3. Transactions

An economic activity that affects the financial position of the business and can be measured in terms of money. Transactions are those activities of a business, which involve the transfer of money or goods or services between two persons.

Exchange of goods and services for consideration.

30 transactions with their Journal Entries, Ledger, Trial balance and Final Accounts

For Example-

  1. Purchase of Furniture 
  2. Purchase of Machinery
  3. Borrowing from bank   
  4. The lending of money,
  5. Salaries paid   
  6. Rent paid,
  7. Commission received    
  8. Dividend received
  9. Cash paid to Mohit 
  10. Cash received from Rachit

Transactions are of two types, namely, cash and credit transactions.

A. Cash Transaction

A cash Transaction is one where cash receipt or payment is involved in the transaction.

For example, When Shubh buys Furniture from Neel-Kamal Furniture paying the price of Furniture by cash immediately, it is a cash transaction.

B. Credit Transaction

A credit Transaction is one where cash is not involved immediately but will be paid or received later.

In the above example, When Shubh buys Furniture from Neel-Kamal Furniture if Shubh, does not pay cash immediately but promises to pay later, it is a credit transaction.

Also read: Basic accounting terms in Hindi

Basic Accounting Terms – 23 Important terms
4. Event
An event is the result of Transactions.For example, goods purchased Rs. 20,000 all the goods sold Rs. 28,000 the result of the transactions profit Rs. 8,000 called an event.

5. Capital

It is the amount invested by the proprietors in the business. This amount is increased by the number of profits earned and the amount of additional capital introduced. It is decreased by the number of losses incurred and the amounts withdrawn by proprietors.

For example, if Mr. Anand starts business with Rs.5,00,000, his capital would be Rs.5,00,000.

For example, if Mr. Anand starts business with cash  Rs.5,00,000, and Goods Rs. 1,00,000 his capital would be Rs.5,00,000+1,00,000= 6,00,000

For example, if Mr. Anand starts business with cash  Rs.5,00,000, and Goods Rs. 1,00,000 and machinery Rs. 1,50,000 his capital would be Rs.5,00,000+1,00,000+150,000 = 7,50,000

20 transactions with their Journal Entries, Ledger and Trial balance

6. Drawings

Drawing is the amount of cash or value of goods withdrawn from the business by the proprietor for his personal use. It is deducted from the capital.

The money or goods or both withdrawn by the owner from the business for personal use is known as drawings. Example: Purchase of car for wife by withdrawing money from the business.

Also read Economic And Non-Economic Activities

Basic Accounting Terms – 23 Important terms

7. 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. It may be in the form of cash receipts, invoices, cash memos, bank pay-in-slip, etc. A voucher is necessary to audit the accounts.

Or

A voucher is a source by which we record the transactions.

8. Invoice

Invoice is a business document which is prepared when one sells goods to another. The statement is prepared by the seller of goods. It contains the information relating to the name and address of the seller and the buyer, the date of sale, and the clear description of goods with quantity and price.

Basic Accounting Terms

Meaning and advantages of Double Entry System

9. Receipt

A receipt is an acknowledgment for cash received. It is issued to the party paying cash. Receipts form the basis for entries in the cash book.

10. Debtor

A person (individual or firm) who receives a benefit without giving money or money’s worth immediately, but liable to pay in the future or in due course of time is a debtor.

The debtors are shown as an asset in the balance sheet. For example, Mr.Anil bought goods on credit from Mr.Salil for Rs.10,000. Mr.Anil is a debtor to Mr.Salil until he pays the value of the goods.

Basic Accounting Terms – 23 Important terms

11. Creditor

A person who gives a benefit without receiving money or money’s worth immediately but to claim in the future, is a creditor. The creditors are shown as a liability in the balance sheet.

For example, Mr.Anil bought goods on credit from Mr.Salil for Rs.10,000 In the above example Mr.Salil is a creditor to Mr.Anil till he receives the value of the goods.

Read: Partnership Deed

12. Proprietor

A person who owns a business is called its proprietor. He contributes capital to the business with the intention of earning profit.

Basic Accounting Terms

13. Assets

Assets are valuable and economic resources of an enterprise useful in its operations. Assets can be broadly classified as:

1.Non-Current Assets: Non-Current Assets are those assets that are held for long period and used for normal business operation.

  For example Land, Building, Machinery plant,   furniture and Goodwill, Motor Vehicle, etc. They are further   classified into:

(a)Tangible Assets: Tangible Assets are those assets which have physical existence and can be seen and touched.

For Example Land, Building, Furniture, Machinery, Plant, Motor Vehicles, computer, etc.

(b) Intangible Assets: Intangible Assets are those assets which have no physical existence and can be felt by operation can not be seen and touched.

For example: Goodwill, Patent, Trademark, copyright, software, etc.

2.Current Assets: Current Assets are those assets that are held for short period and can be converted into cash within one year. The balance of such items goes on fluctuating i.e.

it keeps on changing throughout the year.

For example Debtors, stock, Bills Receivable, Loose tools, spare parts, Cash in hand, cash at bank, etc.

Basic Accounting Terms – 23 Important terms

14. Liabilities

Liabilities are obligations or debts that an enterprise has to pay after some time in the future. Liabilities can be classified as :

  1. Current Liabilities: These are obligations or debts that are payable within a period of one year. For Example Creditors, Bill Payable, Bank overdraft, cash credit, Outstanding Expenses, Income received in advance, etc.
  2. Non-Current Liabilities: Non-Current Liabilities are those obligations or debts that are payable after a period of one year. Example: Bank Loan, Debentures, Long term Loan, etc.

15. Purchase

Purchase refers to the number of goods bought by a business for resale or for use in the production. Goods purchased for cash are called cash purchases. If it is purchased on credit, it is called as credit purchases.

Total purchases include both cash and credit purchases.

Total purchases= Cash purchases+ credit purchases.

16. Purchases Return or Return Outward

When goods are returned to the suppliers/Creditors due to the defective quality or not as per the terms of purchase, it is called a purchase return.

To find net purchases, purchases return is deducted from the total purchases.

Net purchases = Total purchases – purchases return

17. Sales

Sales refer to the amount of goods sold that are already bought or manufactured by the business. When goods are sold for cash, they are cash sales but if goods are sold and payment is not received at the time of sale, it is credit sales. Total sales include both cash and credit sales.

Total Sales= Cash sales+ credit sales

18. Sales Return or Return Inward

When goods are returned from the customers due to defective quality or not as per the terms of sale, it is called sales return or returns inward. To find out net sales, sales return is deducted from total sales.

Net sales  = Total sales sales return

Read: Bank Reconciliation Statement

19. Stock

Stock includes goods unsold on a particular date(Particular point of time). It may be opening and closing stock.

The term opening stock means goods unsold at the beginning of the accounting period.

Whereas the term closing stock includes goods unsold at the end of the accounting period.

Basic Accounting Terms – 23 Important terms

20. Expenses 

The cost incurred by a business for earning revenue is known as expenses. For example, Advertisement, selling and distribution, Rent, Wages, Salaries, Interest, Administration, etc.

21. Revenue

Revenue means the amount receivable or realized from the sale of goods and earnings from interest, dividend, commission,  Rent, and royalties, etc. 

Or    

 Revenue means the amounts of the business earned by selling its products or providing services to customers.

22. Profit

The excess of revenues over its related expenses during an accounting year is known as  profit.

Profit = Revenue – Expenses

23. Loss

The excess of expenses over its related revenues during an accounting year is known as Loss.

Loss = Expenses – Revenue

 

Also read: Basic accounting terms in Hindi

Also read Economic And Non-Economic Activities

 

JK BHARDWAJ

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