Basic Accounting Terms

Basic Accounting Terms

• Transaction:
• Involves Transfer of money, Goods or services between two persons or
accounts.
• Cash Transaction:
• Those transactions where cash receipts or payments are involved.
• Credit Transaction:
• Where cash is not involved immediately but will be paid or received later.
 Basic Accounting Terms
• Proprietor:
• is the person who owns the business. He contributes capital to the business
with the intention of earning profit.
• Capital:
• is the amount invested by the proprietor in the business. This amount is
increased by the amount of profit or additional capital invested by owner and
decreased by amount of losses incurred or withdrawal of capital by owner
from the business.
• Drawings
• is the amount of cash or value of goods withdrawn from the business by the
owner for personal use.
 Basic Accounting Terms
• Assets:
• are the properties of the business. For example, Cash, Plant, Machinery, Land, Debtors,
investments, goodwill, receivables etc.
• Assets can be classified into Tangible and intangible assets.

• Tangible assets are those assets which have physical existence (can be seen and touched). For
example, Plant, Land, Machinery, equipment, stock etc.
• Intangible assets are those which have no physical existence, but their possession gives rise to
certain benefits and rights to the owner. For Example, Trademarks, Copy rights, Good will, Patents
etc
 Basic Accounting Terms
• Liabilities
• are the financial obligations of the business. they denote what the business owes to
outside parties ( e.g., creditors for goods supplied, banks, Government, employees,
investors, or any other body)
• Debtor
• is the person who receives the benefit without giving money or money’s worth
immediately but liable to pay in future. (e.g, receive goods and provide money latter).
Debtors are shown as asset in the balance sheet.
• Creditors
• is the person who provides or gives benefit without receiving money or money’s worth
immediately. (purchase of goods from supplier where supplier is the creditor and the
purchaser is the Debtor) Creditors are shown as a liability in the balance sheet.
 Basic Accounting Terms
• Purchases
• are the amount of goods bought by business for resale or production.
• The goods can be bought on cash as well as credit basis.
• Total purchases = Cash Purchases + Credit Purchases ( or Account Basis)
• Purchases Return
• is the amount of goods that are returned by the business to its supplier and is
also called Return outwards. Goods may be returned to supplier due to
defective quality or not as per specification or terms of purchase.
• Net Purchases = Total Purchases – Purchases Return
 Basic Accounting Terms
• Sales
• are the amount of goods sold that are already bought or produced by the
business. The goods can be sold on Cash or Credit basis or both.
• Cash Sales
• includes sales where cash is received at the time of sale while Credit sales
represents sales where cash is be received later.
• Total Sales = Cash Sales + Credit Sales
• Sales Returns
• refers to goods that are returned by customers due to defective quality or not
being as per terms of sale.
• Net Sales = Total Sales – Sales Return (Return Inwards)
 Basics of Accounting Terms
• Stock
• is the Goods remained unsold at a particular date. The goods remained unsold at the beginning
of accounting period are termed as opening or beginning stock and goods left unsold at end of
accounting period are called as Closing or ending stock.
• Revenue
• is the price of goods sold or service provided or rendered. It is the amount realized or receivable
from sale of goods. (e.g. interest, dividend or commission or fees etc.)
• Expenses
• are the amount spent to produce and sell goods or services. For example, raw material used,
Salaries and wages, electricity bills, rent etc.
• Income
• is the difference between revenue earned and expenses incurred.
• Income = Revenues – Expenses
 Basic Accounting Terms
• Voucher
• is the written document in support of a transaction. It is the proof that a particular
transaction has taken place for the value stated in the voucher. For example, Cash
Receipt, Invoice, Cash memo or bank pay in slip.
• Invoice
• is a business document which is prepared when one sells goods to another. This
document is prepared by seller of goods and contain information relating to name
and address of the buyer, date of sale, description of goods with quantity and price.
• Receipt
• is an acknowledgement for cash received. It is issued to parties paying cash and
entered in the cash book.
 Basic Accounting Terms
• Account
• is the summary of relevant business transactions at one place relating to assets,
liabilities, capital, revenues and expenses.
• It Refers to a brief history of financial transactions of a person or item and has
two sides (i.e., one is called debit side and other is called credit side).
• Debtors:
• The sum total or aggregate of the amounts which the customer owe to the business
for purchasing goods on credit or services rendered or in respect of other
contractual obligations, is known as Sundry Debtors or Trade Debtors, or Trade
Receivable, or Book-Debts or Debtors.
• In other words, Debtors are those persons from whom a business has to recover
money on account of goods sold or service rendered on credit.
 Basic Accounting Terms
• Balance Sheet:
• It is the statement of financial position of the business entity on a particular date. It lists
all assets, liabilities and capital. It is important to note that this statement exhibits the
state of affairs of the business as on a particular date only. It describes what the
business owns and what the business owes to outsiders (this denotes liabilities) and to
the owners (this denotes capital). It is prepared after incorporating the resulting
profit/losses of Income Statement.
• Profit and Loss Account or Income Statement:
• This account shows the revenue earned by the business and the expenses incurred by the
business to earn that revenue.
• This is prepared usually for a particular accounting period, which could be a month,
quarter, a half year or a year. The net result of the Profit and Loss Account will show
profit earned or loss suffered by the business entity.