ACCOUNTING TERMS

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Business entity means a specific identifiable business enterprise like Big bazaar, Super Bazaar, Grocer ’s shop, Transport limited, etc.

For accounting, it is assumed that Business has a separate identity and owner(s) have a separate identity.

Every transaction is analysed from the point of view of a business enterprise and not that of the person(s) who are associated with it.

A Corporate entity under company act 1956 and can do business in its name.

A Business entity can be sued in court of law for breach of contract.

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It is an event which involves exchange of some value between two or more entities.

It can be purchase of stationery, receipt of money, payment to a supplier, incurring expenses, etc.

It can be a cash transaction or a credit transaction.

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Item has arrived in the unit

loc?

Can there be entries with zero value ? Do they

have to be entered?

Sundry Debtor is a person who bought goods or received service from us (Customer)

Is an entity from whom amounts are due for goods sold or services rendered or in respect of contractual obligations.

Amount that has to be recd from other Person

It is also termed as Debtor, trade debtor and accounts receivable.

Sy Dr is an Asset. e.g. Mess Bills , Car loan, House loan for an indl.

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Sundry Creditor is a person from whom we received the goods or services

refers to companies or individuals to which money is owed by us (customer). Amount has to be paid to someone

Creditors are persons who have to be paid by an enterprise an amount for providing goods and services on credit.

Reflected as liability. e.g. Mess Deposits, Memento fund etc,.

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REVENUES ARE AMOUNTS THE BUSINESS EARNS BY SELLING ITS PRODUCTS OR PROVIDING SERVICES TO CUSTOMERS.

SALE OF GOODS & SERVICES.

INTEREST RECD, SALE PROCEEDS OF SCRAP

MTRL ETC,

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Costs incurred by a business in the process of earning revenue are called Expenses.

Expenses are measured by the cost of assets consumed or services used during the accounting period.

The common items of Expenses are, Depre, Rent, Wages, Salaries, Interest, Cost of Heating, Light and water and Telephone, charges etc.

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The difference between revenue and expense is called income. For example, goods costing Rs.25000 are sold for Rs.35000,

The cost of goods sold, i.e.Rs.25000 is expense & the sale of goods, i.e. Rs.35000 is revenue

The difference. i.e. Rs.10000 is income.

We can state that

Income = Revenue - Expense.11

It is the amount invested in an enterprise by its owners e.g. paid up share capital in a corporate enterprise.

It also refers to the interest of owners in the assets of an enterprise.

It is the claim against the assets of the business.

Any amount contributed by the owner towards the business unit is a liability for the business enterprise.

This liability is also termed as capital which may bebrought in the form of cash or assets by the owner.

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Capital Expdr refers to the expdr incurred for acquiring fixed assets or assets which increase the earning capacity of the business.

The benefits of capital expdr to the firm extend over a number of years.

Examples - expdr incurred for acquiring a fixed asset such as building, plant and machinery & land for future reqmt, etc.

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Revenue expdr, on the other hand, is an expdr incurred in the course of normal business transactions of a concern and its benefits are availed of during the same accounting year.

Maint of Existing assets, created out of Capital Expdr.

Salaries, carriage & tn charges , interest payment etc. are examples of revenue expenditure.

All Funds & grants allotted to EME Bn16

Revenues earned by the Firm in normal course of Business.

Eg, Sale of Goods & Services, Interest Payments recd, Sy DRs, Account receivables, Dividends recd, Bonus shares, IT refunds etc,.

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Revenues earned by the Firm Not in normal course of Business.

Eg, Receipts on account of sale of Scrap, Sale of old Plant & Machy, sale of Land bought for Investment purpose and sale of dead Inv.

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Economic resources of a business that can be expressed in monetary terms

These are properties of every discp belonging to a firm e.g., Goods, Cash, furniture, and include all sums of money owned by the account.

They raise the profit earning capacity of the business enterprise.

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Those assets which are acquired for long term use in the business.

Such assets raise the profit earning capacity of the business enterprise.

Expdr on such assets is non-recurring and of capital nature.

Expenses incurred on acquiring these assets are added to the value of the assets. e.g, Plant & Machy, Bldg, land etc,

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Current assets are those assets, which are held for a short period, Generally for < 01 year time frame.

The balance of such items goes on fluctuating i.e. it keeps on changing throughout the year.

e.g. FDs, CDs, Cash in Bank ,Bank deposits and Govt securities etc,

Reqd for Smooth fn of a firm on daily basis.

Mgt of Cash flow.

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Tangible items are those which can be touched and their physical presence can be noted/ felt.

e.g., furniture, land , bldg , plant & machinery etc.

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Intangible assets are those rights which one possesses but cannot be quantified in terms of money.

e.g. Patent rights, Copyrights, trade marks, goodwill, Human capital etc.

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ASSETS WHICH DECR WITH USAGE

RAW MTRL, INV, etc,.

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OBLIGATIONS OR DEBTS THAT THE ENTERPRISE MUST PAY IN MONEY OR SERVICES AT SOMETIME IN FUTURE.

A/C PAYABLE (SY CR).

LOANS/ DEBENTURES/BOUNDS/DEPOSITS.

ACCRUALS (SALARIES, WAGES, INTREST DUE BUT NOT YET PAID).

TAXES.

DIVIDENDS NOT YET PAID.

RAISED CAPITAL.

RESERVES AND SURPLUS.

ADVANDCES PAID BY CUSTOMERS.

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BUSINESS ENTITY CONCEPT

MONEY MEASUREMENT CONCEPT

GOING BUSINESS CONCEPT

CONSERVATIVE PRINCIPLE

DUAL ASPECT PRINCIPLE

Dual aspect is the foundation or basic principle of accounting.

It provides the very basis of recording business transactions in the books of accounts.

This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides.

Therefore, the transaction should be recorded at two places.

It means, both the aspects of the transaction must be recorded in the books of accounts.

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For example, goods purchased for cash has two aspects which are, Payment of cash Receiving of goods(Assets).

• These two aspects are to be recorded.

Thus, the duality concept is commonly expressed in terms of fundamental acctg equation :-

Assets = Liabilities + Capital

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This equation expresses the equality of assets on the one side and other side equity i.e., the claims of outsider [liabilities] and owners or proprietors fund on the other side.

In mathematical form, Assets = Equity

Equity = Liabilities + Capital As an asset is introduced in the business,

a corresponding liability also emerges. 40

For example, pers X started business with cash Rs.2,00,000 as Capital.

In this transaction, asset in the form of cashis created for the business.

Hence, Cash (Asset) Capital (Equity)Rs.2,00,000 = Rs.2,00,000

X purchased Machinery for Rs.40,000 and Furniture for Rs.20,000.

Thus, the position of the assets and capital is as: Cash + Machinery + Furniture = Capital 1,40,000 + 40,000 + 20,000 = 2,00,000

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The above transaction shows that Assets = Capital

Or Capital = Assets

Increase or decrease in capital will result in the corresponding increase or decrease in assets.

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The above accounting equation states that the assets of a business are always equal to the claims of owner/ owners and the outsiders.

This claim is also termed as capital or owners equity and that of outsiders, as liabilities or creditors’ equity.

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 Is based on the duality principle and was devised to account for all aspects of a transaction. Under the system, aspects of transactions are classified under two main types:

Debit and

Credit

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Debit is the portion of transaction that accounts for the increase in assets and expenses, and the decrease in liabilities, equity and income.

Credit is the portion of transaction that accounts for the increase in income, liabilities and equity, and the decrease in assets and expenses.

The classification of debit and credit effects is structured in such a way that for each debit there is a corresponding credit and vice versa. Hence, every transaction will have 'dual' effects (i.e. debit effects and credit effects). 50

1. Capital brought in by the owner of the Business,

The two aspects in this transaction are Receipt of Cash Increase in Capital (Owners Equity)

2. Purchase of machinery by chequeThe two aspects in the transaction are Reduction in Bank Balance Owning of Machinery

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3. Goods sold for cashThe two aspects are Receipt of cash Delivery of goods to the customer

4. Rent paid in cash to the landlordThe two aspects are Payment of cash Rent (Expenses incurred).

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Bank Reconciliation Statement is a statement prepared to reconcile the difference between the balances as per the bank column of the cash book and pass book on any given date.

Thus, it is prepared to reconcile the bank balances shown by the cash book and by the bank statement.

It helps in detecting, if there is any error in recording the transactions and ascertaining the correct bank balance on a particular date.

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1. Cheques issued by the firm but not yet presented for payment

2. Cheques deposited into bank but not yet credited

3. Amount directly deposited in the bank account

4. Bank Charges

5. Interest and dividend received by the bank

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6. Direct payments made by the bank on behalf of the customers

7. Dishonour of Cheques.

8. Errors committed in recording transactions by the firm

9. Errors committed in recording transactions by the Bank

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Trial Balance may be defined as a statement which contains balances of all ledger accounts on a particular date.

Trial Balance consists of a debit column with all debit balances of accounts and credit column with all credit balances of accounts.

The totals of these columns if tally, it is presumed that ledger has been maintained correctly.

However, Trial Balance proves only the arithmetical accuracy of posting in the ledger.

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1. To check arithmetical accuracy

2. First step to help in preparing Financial Statements

3, Helps in locating errors

4. Helps in comparison

5. Helps in making adjustments

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