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Entity the video (Click Here)

An Entity means an Economic unit which performs Economic activities. An

Economic unit may be:
Business entity (Enterprise)
Non-business entity.
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Business Transaction the video (Click Here)

An Economic activity of
the business that changes
its financial position.

Relationship with the Mode of Settlement of

Accounting Unit Value

Internal External Cash Credit

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Accounts the video (Click Here)

It is a Record of transactions under that head.

It is a record of transactions (both cash and credit) under a particular head of
account (say Sales, Purchases, Salaries, Rent, Olivia, Cash, etc.).
It shows the amounts of transactions and also their effect and direction.

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Capital the video (Click Here)

Capital is the amount invested in an enterprise by the Proprietor (in case of

proprietorship) or by Partners (in partnership business).
In the case of Companies contributors of capital are many and they are known as
Shareholders.
Capital is a liability of the firm towards the proprietor or partners or shareholders.
Capital is also known as Owner’s Equity or Net Worth.
It is always equal to Assets less Outside Liabilities. It can be expressed as:

Capital = Assets - Outside Liabilities

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Drawings the video (Click Here)

Any Cash or Goods withdrawn by the Owner for personal use are called drawings.

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Liability the video (Click Here)

It refers to the amount which the firms is liable to pay to outsiders

(except capital)
Liabilities = Assets - Capital

Internal External
Liabilities Liabilities
Liabilities

Capital and Creditors, Bank,

accumulated Overdraft, Bills payable,
profits. Outstanding expenses,
Loan etc.
Liabilities may be further classified into two parts as under:
1. Long-terms or Non-Current Liabilities-These refer to those liabilities which fall
due for payment in a relatively long period (normally after more than one year).For
Example - Long Term Loans and Debentures etc.
2. Current Liabilities-Current liabilities refer to those liabilities which are to be paid
in near future (normally within one year).For Example - Bank Overdraft, Bills
Payable, Creditors, Outstanding, Expenses and Short Term Loans etc.
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Assets the video (Click Here)
Assets are the properties (tangible assets and intangible assets) owned by an entity or
enterprise. They are the economic resources of the business which will give benefit in
future. Characteristics of a Business Transaction are:
1. It should be owned (ie., property) by the business.
2. It may be in tangible (physical) form or intangible form.
3. It should have some value attached to it.
4. It should be capable of being measured in money terms

Classification of Assets

Non-Current Assets Current Assets Fictitious Assets

Tangible Intangible
Assets Assets
 1. Non Current Assets - Assets owned by the entity not meant for resale.For
example- Fixed assets, Non-current Investments, Long-term Advances and Other
Non-current Assets.
2. Fixed Assets-Fixed assets are those non-current assets of an enterprise which
are held with the purpose to increase its earning capacity. Fixed assets are
further classified into:
Tangible Assets-Assets having physical existence.
Intangible Assets-Assets not having physical existence.
3. Current Assets-Assets which are held by an entity or enterprise with the purpose
of converting them into cash within a short period, ie, one year. For example -
Stock, Prepaid Expenses, etc.
4. Fictitious Assets-Expenses or losses not written off in the year in which they are
incurred but written off in more than one accounting period. For example-
Deferred Revenue Expenditure such as Advertisement Expenditure.
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Receipts the video (Click Here)

Receipt is the amount of cash received from a specific event.

1. Revenue Receipts-Amount received in the normal course of business or from use of
business resources.For Example-Amount received against sale of goods.
2. Capital Receipts-Receipts which are not revenue receipts resulting in increase in
assets or decrease in liability.For example - Capital contribution by owners, Receipts
from sale of fixed asset.
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Expenditure the video (Click Here)

Expenditure is the amount spent on purchasing assets, goods or services.

1. Capital Expenditure-Expenditure incurred to purchase or improve fixed assets.For
example - Purchase of building, furniture, etc.Capital Expenditure is shown on the
assets side of the Balance Sheet.
2. Revenue Expenditure-Expenditure whose benefit is consumed within the
accounting period.For example - Salary, Rent paid.
3. Deferred Revenue Expenditure - It is a revenue expenditure in nature but is
written off (charged) to Profit & Loss Account in more than one accounting period
because it is estimated that benefit of such expenditure will be available in more
than one financial year.For example - Large advertising expenditure.

Expenses Didn’t understand? Watch

the video (Click Here)

Expense is the cost incurred for earning revenue.

1. Prepaid Expense - It is an expense that has been paid in advance and the benefit of
which will be available in the following year or years.
2. Outstanding Expense-It is an expense that has been incurred during the accounting
year but not paid.
 Income
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Income is the profit earned during an accounting period.It is a broader term than
'profit' and includes profit from activities other than its Operating Activities.

Income=Revenue+Other Income- Expenses

Profit
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the video (Click Here)

Profit means income earned by the business from its Operating Activities.Operating
Activities are activities a business performs to sell a product.

Profit= Sales-Cost Of Goods Solds(COGS)

1. Net Profit-Net Profit is the profit after deducting indirect expenses and non-
operating expenses from Gross Profit plus Non-operating income.
2. Gross Profit-Gross Profit is the difference between revenue from sales and/or
services rendered and its direct cost.

Gain
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the video (Click Here)
A financial benefit from events or transactions that are not part of a company's normal
operations.It is a profit that arises from transactions which are not the Operating, i.e.,
business activities of the business but are incidental to it such as gain on sale of land,
machinery or investments.

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Loss the video (Click Here)

Loss is excess of expenses of a period over its revenues and other Income. It is a
broad term and includes loss incurred in its operating (business) activities, money or
money's worth lost against which the firm receives no benefit, e.g., cash or goods lost
in theft and loss arising from events of non-recurring nature, e.g., loss on sale of fixed
assets.

Note - It decreases the owner's equity.

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Purchases & Sales the video (Click Here)

‘Purchases' means purchase of goods for resale or raw materials for manufacturing
of goods. It includes both cash and credit purchases of goods.
‘Sales' means sale of goods.It includes both cash and credit sales.
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Goods & Stock/Inventory the video (Click Here)

Goods-Goods purchased for resale or raw material purchased for manufacturing

product.
Stock (Inventory)-Stock is a current asset held by an enterprise for the purpose of
sale or for the purpose of using it in the production of goods.
Stock (Inventory) may be:
Opening Stock (Inventory) or
Closing Stock (Inventory).

Trade Recievables
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the video (Click Here)
It refers to the amount received or receivable on account of sale of goods or services
rendered by the company in the normal course of business.Trade receivables include
both Debtors and Bills Receivables.
Debtors-The terms ‘Debtors’ represents those persons or firms to whom goods
have been sold or services rendered on credit and payment has not been received
from them.
Bill Receivable-It is an accounting term for bills of exchange drawn on debtors.
The amount specified in such a bill is receivable at a future date.

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Trade Payables the video (Click Here)

Trade Payables is the amount payables on account of goods or services taken in the
normal course of business.Trade Payables include both ‘Creditors’ and ‘Bills Payables’.
Creditors-The terms ‘Creditors’ represents those person or firms from whom
goods have been purchased or services procured on credit and payment has not
been made to them.
Bills Payables-Bills Payable is an accounting term for bills of exchange accepted in
favour of creditors. The amount specified in such a bill is payable at a future date.

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Cost the video (Click Here)
It is the amount of expenditure incurred on or attributable to a specified article,
product or activity.
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Voucher the video (Click Here)

An evidence of transaction having taken place. Types Of Voucher are as follows:

1. Accounting Voucher-It is prepared from the Source Vouchers showing the
account heads debited and credited.
2. Source Voucher-It is an evidence of a business transaction. Examples:Cash
Memo, Invoice or Bill, Receipt, Pay-in-slip, etc.
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Discount the video (Click Here)

It is the reduction in the price of goods or from the amount to be paid to a customer by
the enterprise. Discount allowed may be Trade Discount, Cash Discount or Rebate.
Trade Discount- Reduction allowed in the value of goods sold.
Cash Discount- Reduction in amount payable or receivable due to timely payment.

Other Important Accounting Terms Didn’t understand? Watch

the video (Click Here)

1. Entry- When a transaction or event is recorded in the books of accounts, it is

called ‘entry’.
2. Bad Debts- It is the amount that has become irrecoverable from a debtor. It is a
business loss & is debited to Profit & Loss Account as an expense.
3. Insolvent- A person or an enterprise which is in a position to pay its debts is
called Insolvent.
4. Solvent- A person an enterprise which is in a position to pay its debts is called
solvent.
5. Financial Statements or Final Accounts- Statements prepared at the end of the
accounting period to determine financial performance & financial position.
6. Insolvent- A person or an enterprise which is in a position to pay its debts is
called Insolvent.
7. Investments- It refers to deployment of funds in the shares or debentures of
Companies with the intention of earning a return.
8. Livestock- Domestic animals, such as cattle or horses are known as livestock.
9. Turnover- It means total sales made in a particular period.
10. Balance Sheet- A statement of balances of assets and liabilities.
11. Book Value- Value of asset as existing in the books of account.
12. Credit- Traditionally, right side of an account is the credit side.
13. Debit- Traditionally, left side of an account is debit.
14. Depreciation- Depreciation is fall in the book value of an asset because of usage
or with efflux of time or obsolescence or accident.
15. Proprietor- The person who invests amount in business and bears all the risks
associated with the business is called Proprietor.