Accounting

Basic Accounting Terms and Approaches

Manthraa, Monisha, Siyaa and Tanya. 07.12.2021

 Basic Accounting terms
1. Transactions:
Transaction means any event, dealing or activity which is measurable in terms of
money. It generally involves exchange of value or befit in the form of money or
moneys worth between the business and any other person, including the
proprietor of the business, who deals with the business and results in a change in
the financial position of the business.
Types of transactions:
• Cash transaction
• Credit transaction
• Barter transaction
• Paper transaction

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A. Cash transactions :
A cash transaction refers to any business transaction where the value of
the transaction is settles in cash immediately or readily.
B. Credit transactions:
A credit transaction is a business transaction where the value of the
transaction is nit settles immediately, but its settlement is postponed to a
further date.
C. Barter transactions:
A barter transaction is a business transaction where there is an exchange
simultaneously, but the exchange of benefits is not in terms of money,
but in terms of goods.
D. Paper transactions:
A paper transaction is a business transaction where there is no question
of meeting the value of the transaction.
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2. Entity:
The term entity means an economic unit having a separate individual
identity or existence. It means a person to a thing have a definite,
individual or separate existence. In a business the proprietor and the
business enterprise has its own identity and existence.

3. Proprietor/ Owner:
A proprietor or owner is a person who invest money or moneys worth
into a business as capita. Ad bears all the risks of business undertaken
by him, he is rewarded with profits. The proprietor maybe be an
individual as in case of sole proprietorship or partners in case of
partnership forms or shareholders in case of a joint stock company.

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4. Drawings:
Drawings refers to cash, goods or an other assets withdrawn by the
proprietor from his business for his personal, private or domestic uses
or purposes.
5. Purchases:
Goods purchased by a business fir production or resale are called
purchases. It is recorded in purchases account.
6. Sales:
Goods sold by the business are called sales. It is recorded in sales
account.
7. Goods:
Goods refer to commodities, products, articles or things in which a
trader deals, which is meant for resale purpose.
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8. Capital:
The amount of money or money’s worth worth stock of goods, furniture,
machinery, property, house, etc, invested or introduced by the
proprietor into his business at the time of the commencement of
business is called capital.
9. Firm/ Organisation:
Firm or organisation means a business concern or enterprise. A
busniesss concern, business enterprise or business organisation maybe
a sole proprietorship, a partnership firm, a co-operative society, a joint
family, etc.
10. Income:
Income is the amount left after deducting the costs of goods or services
sold and the selling and distribution and other expenses and also losses
from the sale proceeds of goods or series, earning on investments and
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profit on sale of assets. It maybe called as net revenue or net profit.
11. Debitors:
A debtor is a person who owes the business money. He constitutes the assets of the business.
There are 4 types of debtors:
A. A trade debtor
B. A loan debtor
C. A debtor for an asset sold on credit
D. A debtor for the service rendered on credit
12. Creditors:
A creditor is a person to whom the business owes money. He constitutes the liabilities of the
business.
There are 4 types of creditors:
E. A trade creditor
F. A loan creditor
G. A creditor for an asset purchased on credit
H. An expense creditor (a creditor for an unpaid expense)

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13. Assets:
Assets means enough economic resources owned and used y a
business concern for carrying on the business. Assets are properties
and possessions owned by a business which benefit the future period
or periods. They could also mean things or value owned by a business
undertaking.
Assets has 3 aspects:
A. Physical or real properties or things called tangible assets like
lands, buildings, plant and machinery, furniture, cash, etc.
B. Rights in certain things or certain rights having money value, called
intangible assets like goodwill, patent rights, trademarks and
copyrights.
C. Debts or amounts due to a business from other, such as sundry
debtors, receivable bills, accrued incomes, etc. Monisha
14. Entry:
Entry means the record of a transaction in the book of original entry or
first entry.
15. Expenses:
Expenses mean the costs incurred or amounts spent in the process of
earning revenues in an accounting period.
Example: costs of goods sold or services rendered, administration or
office expenses, selling and distribution expenses, etc.

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Modern Approach/ American Approach.

American Approach

Assets Account Revenue Account

Liabilities Account Capital Account

Expenses Account
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 Assets Account:
Land and building, plant and machinery, furniture, patents, inventory, bank and cash, etc.
RULE: Debit the increase; Credit the decrease
Example:
Machinery a/c Dr
To cash a/c
(Being machinery purchased for cash)
Cash a/c Dr
To furniture a/c
(Being furniture sold for cash)
Liabilities Account:
Accounts of lenders, creditors for goods, outstanding expenses, etc.
RULE: Debit the decrease; Credit the increase
Example:
Purchases a/c Dr
To Murali a/c
(Being goods purchased from Murali on credit)
Murali a/c Dr
To cash a/c
(Being cash paid to Murali o account)
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 Capital Account:
Accounts of proprietors/ partners who have invested in the business. Includes both capital and drawings a/c.
RULE: Debit the decreases; credit the increases.
Example:
Drawings a/c Dr
To cash a/c
(Being cash withdrawn by owner for personal use)
Cash a/c Dr
To capital a/c
(Being cash brought in as capital)
Revenue account:
Accounts of incomes and gains. Ex: sales, discount received, interest received, bad debts recovered, etc.
RULE: Debit the decreases; credit the increases .
Example:
Sales returns a/c Dr
To Bose’s a/c
(Being goods sold to Bose returned)
Cash a/c Dr
To sales a/c.
(Being cash received from sale of goods)
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 Expenses Account:
These are accounts of expenses or losses incurred in carrying out the
business.
Ex: Purchase, wages, salaries, discount allowed, rent, depreciation, etc.
RULE: Debit the increases; credit the decreases.
Example:
Purchases a/c Dr
To cash a/c
(Being goods purchased for cash)
Cash a/c Dr
To Purchases a/c
(Being goods purchased returned)
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