1 basic concepts
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Basic Accounting TermsAssets : Whatever business owns, is treated as assets. It can be classified as Fixed Asset : Like land, building, machinery Current Asset : Like goods, bank balance , cash, debtors , bills receivable. Tangible Assets : Physically exists.Intangible Assets: Physically does not existsWasting Assets :Consumable during the use like mines, quarries etc.
Liabilities: Mean the amount which business owes to outsiders. It can be classified as Long Term Liability : Payable after a long term like long term loan, debentures, etc. Current Liability : Payable in near future like creditors, bank o/d , short term loan, bill payable, etc.Capital : The amount (money) which has been invested by the proprietor in the business. CAPITAL = ASSETS LIABILITIESExpenses: The amount spent to produce n sell the goods and services.
Income : Profit earned during a period of time. INCOME = REVENUE EXPENSEExpenditure: Amount spent or liability incurred for the value received. It may be of two types Capital Expenditure: Amount spent in purchasing the assets. Revenue Expenditure: Amount spent in purchasing the goods and services during the accounting period. Revenue : Amount received by the sale of goods or services.INCOME = REVENUE - EXPENSES
Debtor : A person to whom goods has been sold on credit.Creditor: A person from whom goods has been purchased on credit.Goods : They are the items which are part of stock-in- trade of business, which are purchased and are to be resold.Cost : Amount spent on manufacturing of article ,product or activity.Gains : Profit earned by sale of the article.Stock or Inventory: Tangible assets held by the enterprise for the purpose of sale in ordinary course of business.
Purchases: Purchase of goods. Sale : Sale of those goods in which firm deals.Loss :Excess of expenses over revenue.Profit : Surplus of revenue over expenses.Discount : Any type of Reduction in the prices.Drawings : Amount of money or the value of goods proprietor takes for his domestic or personal use..Receivables: Amount due from others or amount receivables from others. (debtors)
Payables : Amount due to others. (Creditors)Depreciation : Fall in value of an asset because of usage or with passage of time or obsolescence or accident.Cost of Goods Sold :Direct cost of goods or services.
Bad Debts : The amount that has become irrecoverable. It is a business loss.
Accounting EquationsAsset = Capital + Liabilities
Accounting EquationCashBank Bills Rec.DebtorsClosing StockFurnitureMachineryBuildingCapitalCreditorsBills Pay.O/s ExpensesBank O/dLoan
Assets Are equal to Capital + Liabilities
Transaction from A/c equation viewpoint can be divided into two Transactions Affecting Two Items; andTransactions Affecting More Than Two Items.Transactions Affecting Two Items:1.Transactions affecting opposite side :- a) Increase in asset, increase in liability. b) Decrease in liability, decrease in asset. c) Increase in asset, increase in owners equity. d) Decrease in owners capital, decrease in asset.
Transaction affecting same side but in opposite direction are:
Increase in asset, decrease in another asset.Decrease in liability, increase in another liability.Decrease in owners equity item, increase in owners another equity item.Decrease in owners equity item, increase in owners another equity item.Decrease in liability, increase in owners equity item.
Transaction affecting more than two items:Some transactions affects more than two items . Example: Sale of goods worth Rs 30000 in cash.Item affected (costing 25000)Increase Cash by Rs. 30,000Stock Reduce by Rs. 25,000Capital increase by Rs 5,000 (Profit added)
Derivation of an A/c EquationAn equation can be derived by the following way:Ascertain the variables affected by a transaction. Assets, liabilities, capital, revenues and expenses. Find out the effect of a transaction on the variables. Whether increase or decrease.Show the effect on the appropriate side and ensure the total must be same of both side.
Example 1Started business with Rs.1,00,000.1 Variable effected Assets and Capital2 effect of Transaction Incr. in Asset and Cap on Affected variable3 Accounting Equation Assets= Liab.+ Capital 1,00,000= 0 +1,00,000
Types of Accounts
Accounts Personal AccountReal AccountNominal Account
Personal AccountThis A/c are related with Natural Person Artificial personal and Representative.Natural Person : Ram, Rahim, Mohan.Artificial Person: Firms, Companies, Banks etc.Representative: All accounts representing outstanding expenses and accrued or prepaid incomes are personal accounts.
Real AccountTangible Real Account: like furniture , Cash, Machinery etc. Intangible Real Account : Like goodwill , trade mark etc, which cannot be touched.
Nominal AccountThe names of head of expenses and income are called nominal account. Example: Wages account, salaries account, commission account, rent account, etc,
Rules for Debit and CreditPersonal AccountDebit the receivers account and credit the givers accountReal AccountDebit the account of what comes in and credit the account of what goes out.Nominal AccountDebit the account of expenses andCredit the account of income and gains.Golden Rule of JournalsDebit what comes in and Credit what Goes out.