Learning Outcomes

After studying this Chapter, you shall be able to:

 Know the meaning of Accounting Terminology
 Understand the terms using case studies

2.1 INTRODUCTION
The accounting is the language of the business. Like any other language, the accounting uses
certain basic terms which are widely used in this language. The proper understanding of
these terms is required as, in real sense; they are the alphabets of the accounting language.
In this chapter, the following basic accounting terms have been explained.

(1) Entity (10) Sales Returns (19) Trade Receivable

(2) Business Transaction (11) Receipts (20) Trade Payable
(3) Assets (12) Expenditure (21) Discount
(4) Liabilities (13) Expense (22) Voucher
(5) Capital (14) Income (23) Insolvent
(6) Drawings (15) Profit (24) Bad Debts
(7) Purchases (16) Gain (25) Depreciation
(8) Purchases returns (17) Loss
(9) Sales (18) Stock

2.2 Entity
In common parlance, “entity refers to something that exists apart from other things, having
its own independent existence”. A business entity means an enterprise which is established
in accordance with law, usually with the objective of engagement in business activities. The
types of business entities included sole proprietorship, partnership, company, etc. However,
there are some organizations like NGO’s which do not have profit motive, yet they are
regarded as entity in accounting.
2.3 Business transaction
The term “Business Transaction” refers to those economic activities and events that affects
the financial position of a business and are capable of being expressed in monetary terms. It
is definitely a financial event which may be either internal or external.
The transaction may be grouped, on two bases i.e. Relationship and mode of settlement:

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(a) On the basis of relationship: The transactions are generally classified into two
broad categories:
External Transactions: It takes place between at least two parties, out of which are
the business enterprise itself and other being outside party. For example: sale of
goods, purchase of goods, wages paid, etc.
Internal Transactions: It does not involve second party as it takes place within the
enterprise. For example: when depreciation is charged by an entity on its fixed
assets, no other outside party is involved yet it is accounting transaction which
needs to be recorded. It may also be called as pure accounting transaction.
(b) On the basis of mode of settlement: A business transaction may be a cash
transaction or a credit transaction.
Cash Transactions: In this type of transaction, the settlement is made on the spot.
For example: if goods have been purchased for cash, then it involves immediate
outflow of cash. This transaction may relate to inflow of cash also. The cash
transaction may be in the form of cash, cheque or through any other digital mode.
Credit Transactions: This transaction does not involve immediate flow of cash. In
fact, it creates either an asset or liability up to the point it is settled in cash.

2.4 ASSETS
Assets are the economic resources or properties owned by a business. The term economic
resources refer to those items of value which will enable the entity to get economic
benefits. The assets are used for the operations of the business and it includes the amount
due to it from others. For example: if a firm has to receive Rs. 50,000 from Mohit to whom it
had sold goods on credit, then this Rs.50,000 shall also be treated as asset. Similarly, the
Machinery or Furniture owned by the business unit is also an asset. As per finney and miller,
Assets are future economic benefits, the rights, which are owned or controlled by an
organization or individual”. The following are the characteristics of assets:
(a) It is the property of the businesss i.e. owned by the business.
(b) It shall have same value attached to it.
(c) Such value is capable of being maeasured in money terms.
(d) It reflects the legal right belonging to the business unit.
The assets are broadly classified into two types Viz. Fixed Assets and Current Assets.
Fixed Assets: Fixed Assets are those Assets which are held by the business from a long term
point of view. These assets are held not to resell and are used for the normal operations of
the business. The fixed assets are further divided into:
(a) Tangible Assets: These are those fixed Assets which have physical existence and
therefore, they can be seen and touched. For example: plant and machinery, land and
Building, Furniture, Computer, Motor Vehicle, etc.
(b) Intangible assets: These are those fixed assets which lack physical appearance and thus,
cannot be seen or touched. For example: Goodwill, patents, Copyrights, Trademarks,
Software, Development Rights, etc.
Current assets: The current Assets are those assets which are meant for sale or with the
purpose of converting them into cash within one year. For example: Debtors, Bills
receivables, stock, Prepaid expenses, Marketable Securities, etc. As per The Institute of
Certified Public Accountants, USA, “Current Assets include cash and other assets or

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resources commonly identified as those which are reasonably expected to be realized in

cash or sold or consumed during the normal operating cycle of the business.”

Did You Know PREPAID & FICTITIOUS ASSETS

Prepaid Expense: Prepaid expense refers to payment for expense in an accounting
period, the benefit for which will accrue in the subsequent accounting period(s).
Although, prepaid expenses cannot be converted into cash yet they are classified as
current assets. The reason being the expected availability of benefit or service in
the next accounting year.
Fictitious Assets: these assets are not those which can be realized in cash nor any
further benefit can be derived. In fact, these are neither tangible nor intangible but
are those losses which have not yet been written off in the year in which they are
incurred. The examples are debit balance of profit & Loss A/c, Expenditure not yet
written off such as heavy advertisement expense, etc. These are called as fictitious
as these are not assets in real sense but are shown on the asset side just for the
purpose of transferring them to Profit and Loss A/c in next accounting periods(s).

2.5 Liabilities
The liabilities are the financial obligation of an enterprise other than owner’s fund. Thus,
liabilities are obligations or debts that an entity has to pay at some time in the future. For
example: Creditors, Bills Payable, bank overdraft, terms Loan, debentures (In case of
companies), etc.
Is Capital a part of liability?
As per Business Entity Principle, business is considered to be seprate from its owners. Thus,
entity concept states that the enterprise is liable to the owner for capital investment made
by him. Considering this philosophy, there is a liability of the business towards the owners.
It may be called as internal liability. In that scenario, the liability of enterprise towards the
outsiders (i.e. other than owners) is termed as external liability. This external liability arises
due to credit transactions, loan taken or any deferment of outflows in respect of existing
obligations.
Classification on the basis of period:
Non–Current Liability: it is that liability which falls due for payment after a period of more
than a year from the end of accounting year. It is important to note that this classification is
based on the status as on the last date of the accounting period. For example: if from had
taken a Term loan five years back, which is payable in next year, then it shall be classified
as current liability and not Non – current liability because this loan is payable within a
period of one year. The examples of Non-current liability are long term loans, debentures
(in case of company), etc.
Current liability: It is that liability which is payable within 12 months from the end of
accounting year. The examples are creditors, Bills Payable, Bank overdraft, outstanding
expenses, etc.

2.6 Capital
It is the amount invested in the firm by the proprietor (partners in case of partnership firm).
It may be contributed in the form of cash or assets having monetary value. It is the amount
with which the goods and assets are purchased initially. Such capital is an obligation for the
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firm towards the owner. It is, there fore, shown as capital on the liability side of the
balance sheet. The capital increases when profits are earned or additional capital is
contributed. On the other hand, this capital reduces in case the loss in incurred by the
business or when amount is withdrawn by the owner. It may be calculated as:
Capital = Assets – Liabilities.
Therefore, capital is also known as owner’s equity or Net worth.
Example:- As on 31st December 2019, The following information is available:
Stock 40,000
Debtors 60,000
Creditors 11,000
Fixed Assets 2,10,000
Bills Payable 9,000
Term Loan 1,15,000
Find out Capital.
Solution:
Assets = 40,000 + 60,000 + 2,10,000 = Rs. 3,10,000
Liabilities =11,000 + 9,000 + 1,15,000 = Rs.1,35,000
Capital = Assets – Liabilities
= Rs. 3,10,000 – Rs. 1,35,000 = Rs.2,75,000

2.7 Drawings
It refers to the resources of the firm used by the owner for personal purposes. The drawings
may be in the form of cash or even as goods. It may be noted that drawings reduces the
investment of the owner. Therefore, although the amount is initially debited to an
intermediary Account opened in the name of “Drawing A/c”, but ultimately it is deducted
from the capital, at the time of preparing the Balance sheet.

2.8 Purchases
The term “Purchases” is used in accounting only for the purchase of goods or raw materials
for resale or for producing products which are also to be sold. It includes both cash as well
as credit purchases. It is pertinent to note that purchase of asset is not regarded as
“Purchases” in accounting. Rather, it is called as “Purchase of Asset”.
(a) In the case of a trader: Purchases are made of merchandise for resale with or without
processing.
(b) In case of Manufacture: Purchases are made of raw material which is processed further
and converted into finished goods and then sold.

2.9 Purchases Return

Sometimes, the goods earlier purchased are returned to the supplier. It may be due to
defective goods, late supply, quantity received in excess of requirement, etc. The goods so
returned to suppliers are known as purchases Return or Returns Outward.

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2.10 Sales
Sales are the total revenues from goods sold to customers or services rendered to clients.
The goods sold may be either the goods purchased for resale or the finished goods
manufactured by the enterprise. It may be of two types Viz. (i) cash sales and (ii) Credit
sales. Cash sales means sale of goods for cash whereas credit sale is used when goods are
sold on credit.
It is important to note that “Sales” will not include the sale of any asset of the business
enterprise.

2.11 Sales Return

When the goods earlier sold are returned by the customer, it is called as sales return or
Returned by the customer, it is called as sales Return Or Returns Inward. The revenue
receipts are taken to the credit od Trading & Profit & Loss A/c
2.12 Capital Receipt
The receipts of the enterprise which are not regarded as revenue, are considered as capital
receipts. These are shown in the Balances Sheet of the Enterpries. The example of Capital
receipts are:
(a) Amount received or receivable from the sale of fixed assets like machinery, plant,
furniture, land, building, etc.
(b) Amount received by selling investments.
(c) Amount received by way of loan
(d) Amount contributed by the proprietors or by issue of shares, debentures (in case of
company)
Example:
Classify the following receipts as capital and revenue:
1. Amount received from Debtors
2. Insurance claim received on account of machinery damaged by fire,
3. Interest on investment received.
4. Entrance fees received by social club.
5. Raised term loan from IFCI
6. Cash received on accounting of goods sold for cash
Solution:
Revenue Receipts: 1,3,6
Capital Receipts: 2,4,5
The term capital expenditure is generally used to signify that expenditure which (i)
Increases Quantity of Fixed Assets. (i) Increases Quality of fixed Assets.
Results in the replacement of Fixed Asset.

2.13 Expenditure
The term refers to the amount spent (Disbursement of cash) or incurring a liability for
acquiring assets, goods or services. The expenditure may further be divided as follows:

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(a) Capital Expenditure: it is the amount of expenditure incurred to acquire asset or for
improving an existing asset, which would given benefit for more than one accounting
year as this expenditure increases the earning capacity of the business. These assets are
not held for resale in the ordinary course of business. Therefore, these are shown on the
asset side of the balance sheet. A proption of amount equal to expired utility (Called as
depreciation) is taken to P & L A/c and is deducted from it & balance is disclosed in the
Balance sheet.
Example of capital expenditure are purchase of plant, machinery, building, furniture,
etc.
(b) Revenue Expenditure: it is an amount spent for earning or providing revenue, the
benefit of these expenses do not extend to next accounting period. Since, the benefits
of revenue expenditure would exhanst in current period only, these are shown on the
debit side of Trading Account or profit and Loss Account the Examples of revenue
expenditure are salaries, wages, rent, advertisement, stationery, cost of goods sold, Etc.
Example: Classify the following into capital/Revenue Expenditure:
1. Spent to wards additions to machinery in order to double the production.
2. Paid for painting of factory premises
3. Amount spent for replacement of worn-out parts of machinery
4. Freight and cartage on new machine
5. Overhaul expenses of second –hand machinery purchased
6. Legal expenses incurred to defined a suit for breach of a contract to supply goods
7. Office rent paid for current period
8. Expenses in connection with obtaining a license for running the cinema
9. Expenditure on making few more exits in cinema hall to comply with government
orders.
10. Any expenditures on indented to benefit the current period,
11. Amount spent as travelling expenses of the directors on Trips abroad for purchase of
capital assets.
12. Construction of Factory shed.
Answer.
Capital expenditure = 1,4,5,8,11,12
Revenue Expenditure = 2,3,6,7,9,10
(c) Deferred Revenue Expenditure:
There are certain expenditure which are revenue in nature but the benefits, out of such
expenditure, are likely to be derived over a number of years.
Such expenditures are termed as “deferred Revenue Expenditures”. These are written
off in more than one accounting periods. For example: heavy expenditure an
advertisement.

2.14 Expense
It refers to the amount spent on cost of goods and services used up in the process of
generating revenue during an accounting period. According to R.N. Anthony, “Expense is a
monetary measure of inputs or resources consumed”. The examples are:-
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(i) Cost of goods sold

(ii) Salaries, wages, rent, etc.
(iii) Depreciation (A part of Fixed assets that has been written off)
(iv) Discount allowed, baddebts, etc. It is similar to revenue expenditure explained in
pare 2.13.
Prepaid Expense: when expense is paid in advance in the current period in respect of
future period, it is termed as period expense. It is an asset and is shown on the asset side of
the balance sheet.
Outstanding Expense: It is an expense that has been incurred but has not been paid.
For example: As at the end of the year, Rs.4,000 is due to an employee as salary for the last
month of the year but is not paid due to any reason. This is an example of outstanding
expenses. It is debited to profit & Loss account but, it also appears on the liability side of
the Balance sheet.

2.15 Income
When the net worth of the business enterprise increase, as a result of business activities and
other activities, the increase, as a result of business activities and other activities, the
increase is treated as income. The term “Income” is broader than the term “Profit” because
income may arise due to the business activities or other than business activities. Thus,
income includes Profit.
2.16 Profit
Profit refers to the excess of revenue over expenses during an accounting year from the
normal course of business activities. Thus, Profit means income earned by the business from
its operating activities.
2.17 Gain
It refers to any profit from the business transaction which is other than its main operations;
these are irregular and non-recurring by nature. Thus, gain is a profit that arises from non-
operating activities. For example: Gain on sale of machinery, plant, Building, Investment,
Etc.
2.18 Loss
It is the excess of Expense over revenue it is Decrease the Capital. It is a Broad term which
includes Loss Incurred in operating activities, on operating activities, etc. the examples are
loss incurred in operating activities etc. the example are loss on sale of fixed asset, goods
lost in transit, etc.

2.19 Stock / Inventory

As per accounting standard 2 (Revised) issued by ICAI, stock refers to asset held by an
enterprise.
(a) For sale in the ordinary course of business (Finished Goods)
(b) In the process of Production od such sale work in Progress.
(c) In the form of materials or supplies to be consumed in production process or in the
rendering of servies (Stores, spares, raw materials, consumables.)

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Since, stock is measure of the above items in the hands of the entity, it is also called as
“stock in hand”. In the case of trader, the stock always include finished goods only.
Where as all the three types of stock may be available in case of manufacture.
Stock may be of two types:
(a) Opening stock: it is the stock –in-hand in the beginning of the accounting year.
(b) Closing stock: It is the stock-in-hand at the end of the current accounting year.

Did You Know Merchandise and Stores

Merchandise is the name of goods for resale.
Stores are a part of a manufacturer’s inventory for the purpose of consumption in the
business and not for resale. In fact, Stores and Spares are the spare parts which are
necessary for the production process. They may include spare parts, tools, components of
equipment, lubricants, packing materials, etc.

2.20 Trade Receivables

Trade receivables refer o the amount receivable for sale of goods and /or services rendered
in the ordinary course of business. In other words, I refers to the amount receivable from
clients (In case of sale of rendering of services). It is the aggregate of Debtors and Bilss
receivable.
Debtors:
Debtors is a person or an entity who owe amount to the enterprise on account of credit sales
of goods/services rendered. Since, “Debtor” represents the amount receivable , it is
disclosed as an asset in the balance sheet.
Bills Receivable:
It is a bills of exchanges drawn on the customers in respect of amount due from them
against credit sale of goods and/or services rendered. When Bills Receivable is received,
debitors gets reduced. Like debtors, the bills receivable are also disclosed on the asset side
of the balance sheet,

2.21 Trade Payable

Trade payablesare the amounts payable by the enterprise against goods purchased and
services taken in the normal course of business. It refer to the amount due to the seller of
goods/ Provider of services, By an enterprise and Bills Payable.
Creditors:
Creditors are the persons and /or other entities who have to be paid on account of purchase
of goods (or receipt of services) on Credit From them. Thus creditor is a person to whom an
enterprise owes amount against credit purchase of goods and/or services taken. The
creditors are shown in the balance sheet as “Sundry creditors” on the liability side.
Bills Payable:
It refers to the bills of exchange accepted b the enterprise in favour of suppliers of goods on
creditor from whom services have been taken on credit.
2.22 Discount

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It is the deduction in the price of the goods sold. The discount allowed may be Trade
Discount or cash discount.
Trade Discount: When discount is allowed by the seller to its customers at a fixed
percentage on the list price or catalogue price of the goods, it is called as trade discount.
Although it is shown as a deduction from MRP in the Invoice, but it is not recorded in the
Books Of account.
Cash Discount: It is the discount allowed to a debtor for prompt payment in cash. It is an
expense for the person allowing the discount and income for the other person to whom such
discount is allowed. It is recorded in the books of both the parties as “Discount Allowed”
and “Discount Received” respectively.

2.23 VOUCHER
The documentary evidence in support to a transaction is called as Voucher. For example: At
the time of purchase of goods for cash, we get cash memo. Similarly, invoice is received at
the time of credit purchase of goods. The other examples of vouchers are bill, debit note,
etc.

2.24 INSOLVENT
As per Wikipedia’s dictionary, “Insolvency is the state of being unable to pay the money
owed, by a person or a company, on time. Those in a state of insolvency are said to be
insolvent.” Thus, insolvent is a person or an enterprise which is not in a position to pay its
debts. For example: A business had sold goods on credit to Mr. Manoj at Rs. 5,000. At the
due date, Mr. Manoj expressed his inability to pay the amount in full as his total liabilities
are in excess of total assets. In this situation, Mr. Manoj will be treated as insolvent.
2.25 BAD DEBTS
As per definition given by Investopedia, “Bad debt is a loss that a company incurs when
credit that has been extended to customers becomes worthless, either because the debtor
is bankrupt, has financial problems or because it cannot be collected.” Thus, bad debt is
the amount that has become irrevocable from a debtor. It is treated as business loss and is
charged to Profit and Loss A/c.
2.26 DEPRECIATION
Depreciation is the gradual and permanent decrease in the value of asset. As per William
Pickles, “Depreciation may be defined as the permanent and continuing diminution in the
quality, quantity or value of an asset.” Thus, Depreciation is the fall in the value of an asset
because of usage, effluxion of time, obsolescence, etc. It may be called as expired utility of
a fixed asset. It is a business expense and is taken to Profit and Loss Account.
Did You Know Depreciation is different from Impairment
As per Accounting Standard 28 “Impairment of Assets” issued by ICAI:
An impairment loss is the amount by which the carrying amount of an asset
exceeds its recoverable amount.
Recoverable amount is the higher of an asset’s net selling price and its value in
use. Net selling price is the amount obtainable from the sale of an asset in an
arm’s length transaction between knowledgeable, willing parties, less the costs of
disposal.

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Value in use is the present value of estimated future cash flows expected to arise
from the continuing use of an asset and from its disposal at the end of its useful
life.

Miscellaneous Problems for Practice

Illustration 2.1
Mr. Khush started a business for buying and selling of old cars with Rs. 40,00,000 as
an initial investment. Out of such amount, he purchased 5 cars @ Rs. 2,00,000 each.
He also acquired furniture for Rs. 50,000 in cash. Out of 5 cars purchased, 1 car has
been retained in the business for office use. Mr. Khush sold 3 cars @ Rs. 2,45,000
each for cash. On the basis of this information, answer the following, if no other
expense has been incurred by the proprietor:
(a) What is the amount of Capital with which Mr. Khush started business?
(b) Out of cars purchased, what is the value of goods purchased?
(c) What is Revenue and Expense?
(d) What is the profit earned, if no other expense has been incurred?
(e) What is the value of closing stock?

Solution:
(a) Capital : Rs. 40,00,000
(b) Goods Purchased: 4 Cars @ Rs. 2,00,000 each = Rs. 8,00,000
Asset Purchased: 1 Car @ Rs. 2,00,000 = Rs. 2,00,000
(c) Revenue: 3 Cars @ Rs. 2,45,000 = Rs. 7,35,000
Expense (Cost of Goods Sold): 3 Cars @ Rs. 2,00,000 = Rs. 6,00,000
(d) Profit= Rs. 7,35,000 – Rs. 6,00,000 = Rs. 1,35,000
(e) Closing Stock: 1 Car @ Rs. 2,00,000 = Rs. 2,00,000

Illustration 2.2
The following are some of the business transactions of ABC Limited:
(1) Imported Machinery for sale in India.
(2) Purchased Furniture for office use.
(3) Purchased items for resale on credit basis.
(4) Imported another machinery, to be used in production process and has a life of
5 years.

Solution:
(1) Goods
(2) Asset
(3) Goods
(4) Asset

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Illustration 2.3
Mr. Garib Das, who owed us Rs. 20,000, is unable to pay in full as his liabilities are
more than total assets with him. He paid only 30% of the total due amount:
(i) What is the term that can be used for the debtor (Mr. Garib Das) as he is unable
to pay?
(ii) What is the amount that could not be recovered and the term for that amount?

Solution:
(i) Mr. Garib Das is “Insolvent”.
(ii) Irrecoverable Amount = 70% of Rs. 20,000 = Rs. 14,000
The term “Bad Debts” can be used for the amount not received.

Illustration 2.4
Mr. Vivek deals in gift items. He sold 25 units costing Rs. 40 each at the selling price
of Rs. 60 each. Out of this, Rs. 1,000 was received in cash and the balance is yet to
be received. What is the amount of?
(a) Sales
(b) Debtor
(c) Revenue
Solution:
(a) Sales = 25 units @ Rs. 60 each = Rs. 1,500
(b) Debtor = Sales – Collection = Rs. 1,500 – Rs. 1,000 = Rs. 500
(c) Revenue = Rs. 1,500

Illustration 2.5
Mr. Sunder commenced business of trading in Gift items with Rs. 28,00,000 as an
initial investment. Out of said Rs. 28,00,000, he paid Rs. 11,00,000 towards purchase
of gift items for resale purposes. He further spent Rs. 50,000 on purchase of office
furniture, Rs. 92,000 for purchase of computer, printer and a safe. Out of the total
amount payable, Rs. 12,000 is yet to be paid to the supplier of Computer. Mr. sunder
sold goods costing Rs. 2,50,000 for Rs. 3,15,000 in cash and goods costing Rs.
1,10,000 for Rs. 2,05,000 on credit. Mr. sunder purchased gift items (Goods) again
for Rs. 10,00,000 out of which purchases of Rs. 3,50,000 were on credit. Due to
earthquake, some goods (Gift Items) costing Rs. 18,000 were completely destroyed.
Mr. Sunder received an insurance claim of Rs. 7,000. He paid salary to an employee
Rs. 21,000, Rs. 4,000 is yet to be paid. He also paid insurance premium Rs. 5,500, of
which Rs. 1,500 is for the next year. During the period, Mr. Sunder withdrew Rs.
22,000 in cash for his personal use.
On the basis of above information, answer the following:
(1) What is the amount of Capital invested by Mr. Sunder, in his business?
(2) What is the total amount spent by the owner in acquisition of Fixed Assets?
(3) What is the amount of Long Term Liabilities?
(4) What is the amount of Prepaid expenses/

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(5) What is the amount of Outstanding Expenses?

(6) What is the amount of Current Liabilities?
(7) Find out the amount of Sales.
(8) What is the cost of goods sold?

Solution:
(1) Capital invested by Mr. Sunder is Rs. 28,00,000.
(2) Total fixed Assets acquired is Rs. 1,42,000 (i.e., Rs. 50,000 + Rs. 92,000)
(3) There is no Long Term Liability of Mr. Sunder.
(4) The total purchases are as follows:
Purchase of Goods Amount (Rs.)
For Cash 11,00,000
For Cash 6,50,000
On Credit 3,50,000
Total Purchases 21,00,000
(5) The amount of prepaid expenses is Rs. 1,500 being insurance premium.
(6) The outstanding expenses are Rs. 4,000 being salary payable.
(7) The Current Liabilities of the entity are:
Amount due for Amount (Rs.)
Computer 12,000
Creditors for supply of 3,50,000
goods
Salary Payable 4,000
Total Current liabilities 3,66,000
(8) The total Sales by Mr. Sunder may be calculated as under:
Nature of Sales Amount (Rs.)
Cash Sales 3,15,000
Credit Sales 2,05,000
Total Sales 5,20,000
(9) Cost of Goods Sold = Rs. 2,50,000 + Rs. 1,10,000 = Rs. 3,60,000

Illustration 2.6
On 1st April 2015, Rahul started business by introducing cash Rs. 10,00,000 and Furniture Rs.
2,00,000. He also took a loan from bank of Rs. 3,00,000@ 8% p.a. interest. The following were
the transactions during the year ended 31-3-2016:
1. Purchase of Investment 1,00,000
2. Purchase of Machinery 3,00,000
3. Purchase of Goods 7,00,000
4. Expenses paid 22,000
5. Sale of Goods 9,30,000
6. Income on Investment 11,000

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 2 13 Basic Accounting Terms

At the end of the year:

(a) Closing Stock Rs. 1,35,000 (Sales Value Rs. 1,54,000)
(b) Fixed Assets are to be depreciated by 10%.
(c) Market value of Investments: Rs.1,25,000.
(d) The depreciated value of fixed assets reflects their market value.
Prepare opening statement of affairs and also calculate Business Income assuming all
transactions were on cash basis.

Solution
Opening Statement of Affairs
Capital & Liabilities Amount Assets Amount
Capital 12,00,000 Furniture 2,00,000
8% Bank Loan 3,00,000 Cash 13,00,000
15,00,000 15,00,000
Statement Showing Business Income
Sale of Goods 9,30,000
(-) Cost of Goods Sold (7,00,000 – 1,35,000) (5,65,000)
(-) Expenses (22,000)
(-) Interest on bank loan (24,000)
(-) Depreciation (30,000 + 20,000) (50,000)
Operating Income 2,69,000
(+) Income on Investment 11,000
BUSINESS INCOME 2,80,000

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 2 14 Basic Accounting Terms

TEST YOUR KNOWLEDGE

Objective Type questions

State whether the following statements are True (T) of False (F).
(1) Creditors are the customers from whom we have to recover the amount.
(2) Amount invested by the owner in the firm is called as Capital.
(3) Discount allowed to debtor is a loss.
(4) Depreciation is an expense and not a loss.
(5) Drawings may be in any form i.e. cash or kind.
(6) Purchase returns are also called as Returns Inward.
(7) The Bills of Exchange which gives right to receive the amount is called as Bills receivable.
(8) The documentary evidence in support to a transaction is called as Voucher.
(9) Goodwill is a fictitious asset.
(10) An expense on repair of Machinery is Capital Expenditure.
[Answers: True:- 2,4,5,7,8 False:- 1,3,6,9,10]
Theoretical Questions
1. What do you mean by the term “Business Transaction”? Explain the types of transactions on
the basis of relationship and mode of settlement.
2. Define “Asset”. What are the characteristics of Assets?
3. Explain the two types of receipts namely Revenue and Capital.
4. How will you define “Expenditure”? Briefly explain the classification of expenditure into
Capital and revenue.
5. Giving examples, explain each of the following accounting terms:
(a) Profit
(b) Gain
(c) Loss
(d) Capital
(e) Drawings
(f) Bad debts
(g) Trade Receivables
(h) Trade Payables

Practical Questions

Q.1 A trader sold 100 units costing Rs. 50 each at the selling price of Rs. 95 each. Out
of this, the proceeds for 35 units were collected at the time of sale immediately.
Out of other sales, Rs. 2,500 is yet to be collected in respect of credit sales. In
respect of this transaction, what is the amount of?
(a) Total Sales
(b) Cash Sales
(c) Credit Sales
(d) Revenue
(e) Closing Debtors

[Answers: (a) Rs. 9,500 (b) Rs. 3,325 (c) Rs. 6,175 (d) Rs. 9,500 (e) Rs. 2,500]

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 2 15 Basic Accounting Terms

Q.2 Classify the following into Capital and Revenue Expenditure:

(a) Wages paid for construction of Building.
(b) Wages paid for installation of Machinery.
(c) Wages paid for cleaning the machinery.
(d) Expenses on white washing of the building.
(e) Expenses on routine repairs.
(f) Expenses on Temporary huts at construction site.
(g) Fee paid for taking a license for the first time.
(h) Fee paid for renewal of license.
(i) Freight on purchase of new machinery.
(j) Legal expenses to defend a legal suit.

[Answers: Capital expenditure: (a), (b), (f), (g) and (i)]

Q.3 Classify the following into Tangible and Intangible Fixed Asset:
(1) Machinery
(2) Building
(3) Goodwill
(4) Furniture
(5) Copy-rights
(6) Trade Marks
(7) Debtors
(8) Prepaid Expenses
(9) Plant
(10) Land
(11) Patents.

[Ans.: Tangible: (1),(2),(4),(9), (10); Intangible: (3),(5),(6), (11); Not a Fixed Asset: (7) & (8)]

Q.4 What is the accounting terminology for the following?

(a) Cost incurred in producing and selling goods.
(b) Excess of Revenue over expense
(c) Debtors and Bills Receivable
(d) Amount invested by the owner in the business
(e) Excess amount received on sale of fixed asset as compared to its book value.
(f) Amount that could not be recovered due to insolvency of debtor.

[Ans.: (a) Expense, (b) Income, (c) Trade Receivable, (d) Capital, (e) Gain, (f) Bad debts]

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta
Chapter 2 16 Basic Accounting Terms

Q.5 Mr. Kamal commenced business of trading in stationery items with Rs. 8,00,000
as his initial investment. Out of such amount, he paid Rs. 75,000 for furniture,
Rs. 2,25,000 for purchase of 5 machines, Rs. 1,50,000 for buying goods (i.e.
stationery items). He also employed Mr. Rohit as sales person and Mr. Aman as an
accountant. At the end of the month, he paid Rs. 7,500 as their salaries. After 4
days, out of goods purchased, he sold some gift items for Rs. 32,000 for cash and
some other stationery for Rs. 21,500 on credit basis. He subsequently purchased
stationery for Rs. 55,000 on credit. In the last week of the month, he lost goods
costing Rs. 3,600 due to minor fire in the godown. One of the machinery, which
cost Rs. 45,000, was sold for Rs. 51,000.
You are required to answer the following questions on the basis of above:
(a) What is the amount of Capital of Mr. Kamal, at the commencement of
business?
(b) What are the fixed assets purchased by him?
(c) What is the total value of goods purchased in above period?
(d) What is the amount due to the supplier (creditor)?
(e) What is the gain he earned?
(f) What is the loss he incurred?

[Ans.: (a) 8,00,000 (b) 3,00,000 (c) 2,05,000 (d) 55,000 (e) 6,000 (f) 3,600]

Basic Accounting for Non-Commerce students(GMC) CA. (Dr.) K. M. Bansal& Dr. Ritu Gupta