Common terms in accounting

COMMON TERMS

Business

  • It is an establishment for the conduct of trade or commerce.
  • It denotes activities of person or group of persons, undertaken to exchange goods and/or services with a view to earn income and profit.
  • Example:
    • A manufacturing business,
    • Banking business
    • Insurance business, etc.
  • Business is a semi-agent or a medium which accepts money from the proprietor or investor, pays him if profit is earned and demands from him, if loss is incurred.

Proprietor

  • He is the owner of the business.
  • He invests capital in the business with the invention of earning profit.
  • He undertakes all risks involved in the business.
  • He enjoys all the incomes and profits and bears all expenses and losses if any.
  • He has the claims against net assets of the business i.e., total assets minus liabilities to outsiders.

Assets

  • These are the material and non-material things or possessions or properties of the business including the amounts due to it from others.
  • E.g: Land, buildings, furniture, equipment, plant, machinery, fixtures, cash, bank balance, debtor’s bills receivable, stock of goods, investments, etc., are all assets.

Tangible assets

  • These are assets having physical existence like cash, furniture, land, building etc.

Intangible assets

  • These are assets with no physical existence. But, their possession gives rise to some benefits to owners. E.g. Goodwill, Patents, Trademarks, etc.

Liabilities

  • These denote the amounts, which a business owes to others (other than the proprietor/s) on different accounts such as;
    • Loan from bank
    • Loan from other persons,
    • Creditors for goods supplied
    • Creditors for services rendered to the business, etc.
  • Liabilities are also called creditors equity i.e., Creditors claims on assets.

Capital

  • It is the amount invested by the proprietor/s in the business.
  • For the business capital is a liability towards the owner. It is also called net worth or net assets, i.e., Assets – Liabilities = Capital.
  • Capital is also called owner’s equity or owner’s claim against assets.

Assets = Capital + Liabilities

Or

Capital = Assets - Liabilities

  • Residual value of assets is called capital
  • Reserves and undistributed profits increase the capital
  • Losses (which are not transferred to capital) also increase capital.

Equity

  • Any rights or claims to assets or any interest in property or in a business is known as equity. Therefore, it denotes liabilities.
  • An equity holder may be a creditor, a partner, a shareholder or a proprietor. Therefore, all liabilities of a business are the creditors equity and the capital is owner’s equity.

Therefore, Assets = Capital + Liabilities

= Owners equity + Creditors equity

Accounting equation

  • It is a mathematical form of saying that in any business the total assets always equal to owners equity + creditors equity.

Assets = Owners equity + Creditors equity

Balance sheet

  • It is a statement of financial position of a business at any given time. It discloses the assets, liabilities and owners equity or capital of a business at a given time.
  • The equation i.e., accounting equation is sometimes referred to as Balance Sheet equation.
  • This balance sheet equation is always maintained in the accounts book keeping.
  • That is a position of equality (in values) between assets on one hand and capital and liability on the other hand.

Debtor

  • One who owes debt or money is a debtor, i.e., one who owes money to a business is a debtor.

Creditor

  • One to whom a debt is owed or creditor is a person to whom some money is to be paid for the loan taken or service obtained or goods bought.

Drawings

  • It is the value of the cash or goods withdrawn by the owner or proprietor for his personal or domestic purposes or use. It is opposite of capital.

Revenue and income

  • Sales of products, merchandise (goods for sales and services) earnings by way of interest, rents, wages, salaries, commission, etc., are revenues.
  • ‘Revenue’ is the gross money receipts which increases owners equity (capital) on one hand and also the assets (cash or account receivables) on the other hand.
  • ‘Income’ is the money or money’s equivalent earned or accrued during an accounting period increasing the total of previously existing net assets (net worths) and arising from the sales and rentals of any types of goods or services.
  • Example: When goods of Rs.10,000/- are sold to Rs.15,000/-, the sum of Rs.15,000/- is the revenue, whereas Rs.5,000/- is earned over and above the original asset value of Rs.10,000/- is the income. Similarly the receipts and amounts receivable for services rendered like rent, wages, salary, interest, commission, dividend, etc. are income.

Expense

  • It is the money spent in conducting business activities.
  • It is the expenditure in return for which some benefit i.e., service is received.
  • Exampe: Expenditure on clerk’s salary for clerical services, money spent to pay the wages to labourers for the labour received to the business.

Loss

  • It is depletion or decrease in the value of any asset without resulting in any revenue or benefit.

Service

  • It is the work performed by the business to get revenue or the work obtained from others by spending for the same.
  • Thus, rendering the service results in income and receiving service results in expense.

Goods

  • These are articles bought for resale to earn profit.

Transaction

  • It is the exchange of cash, goods or services in a business.
    • Cash transactions: is one where cash receipt or payment is involved in any exchange.
    • Credit transaction: It is the transaction wherein cash is neither received nor paid at the time of transaction, but involves exchange on credit or debit.
    • Non cash transaction: is one where the question of receipt of cash or payment of cash does not arise at all. Eg. Depreciation, return of goods, etc.

Books of accounts and entry

  • The various books wherein transactions of varied nature of a business are entered are the books of account.

Entry

  • Entry is the record of a transaction of a business in a journal.

Gross profit

  • Difference between selling price and the cost price of the goods is the gross earning or gross profit of the businessman.

Gross loss

  • Difference between cost price and selling price of goods.

Net profit (net income)

  • Surplus remains after charging against gross profit all expenses including depreciation and other provisions properly attributable to the normal activities of the particular group.

Account

  • Summary of similar elements in the transactions relating to a person, thing or service.
  • Example:Cash account, goods account, persons account, income and expenses account, etc., short form A/c or a/c.

Debit and credit

  • These are symbols used while recording transactions. Debit (Dr) refers to the receiving account and credit (Cr) to giving account.
  • If any benefit is received or a person is a receiver of benefit the receiving or receivers account is said to be debited.
  • If benefit is given or a person is a giver of benefit, the giving account or givers account is said to be credited.

Voucher

  • It is a written document in support of a business in respect of a transaction, represented on a carbon or counter copy of a cheque or a receipted bill or an acknowledgement receipt received.

Receipt

  • It is a written acknowledgement of a receipt of cash/money/goods, etc.
  • It is an accounting document recording physical receipt of something acquired/got.

Folio

  • It means the page (number) of a journal or a ledger (J.F and L.F)
Last modified: Saturday, 2 June 2012, 7:24 AM