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.n. goods mean all the items which are, produced, purchased, and sold in the normal course of business.
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
Transaction is an economic activity that affects the financial position of the business 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 or more persons.
Exchange of goods and services for consideration.
30 transactions with their Journal Entries, Ledger, Trial balance and Final Accounts
Examples of Transactions-
- Purchase of Furniture
- Purchase of Machinery
- Borrowing from bank
- The lending of money,
- Salaries paid
- Rent paid,
- Commission received
- Dividend received
- Cash paid to Mohit
- 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. Capital increases with the amount of additional capital introduced and the amount of profit earned. It is decreased by the amount of losses incurred by the business and the amount withdrawn by proprietors for his personal use.
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
The person who is the owner of the business is called Proprietor.
In the other words- The person who invests money, manages, controls, and bears the risk in business with the aim of earning profit is called a proprietor.
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 :
- 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.
- 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 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, rendering services, and earnings from interest, dividend, commission, rent, royalties, etc.
Or
Revenue means the amount 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