KULDEEP MATHURM.B.A. JIWAJI UNIVERSITY GWALIOR

1.1 Basic Accounting TermsThe understanding of the subject becomes easy when one hasthe knowledge of a few important terms of accounting. Some of themare explained below.

1.1.1 TransactionsTransactions are those activities of a business, which involvetransfer of money or goods or services between two persons or twoaccounts. For example, purchase of goods, sale of goods, borrowingfrom bank, lending of money, salaries paid, rent paid, commissionreceived and dividend received. Transactions are of two types, namely,cash and credit transactions.

Cash Transaction is one where cash receipt or payment isinvolved in the transaction. For example, When Ram buys goodsfrom Kannan paying the price of goods by cash immediately, it is acash transaction.

Credit Transaction is one where cash is not involvedimmediately but will be paid or received later. In the above example,if Ram, does not pay cash immediately but promises to pay later, itis credit transaction.

1.1.2 ProprietorA person who owns a business is called its proprietor. Hecontributes capital to the business with the intention of earning profit.

1.1.3 CapitalIt is the amount invested by the proprietor/s in the business. Thisamount is increased by the amount of profits earned and the amountof additional capital introduced. It is decreased by the amount oflosses incurred and the amounts withdrawn. For example, if Mr.Anandstarts business with Rs.5,00,000, his capital would be Rs.5,00,000.

1.1.4 AssetsAssets are the properties of every description belonging to thebusiness. Cash in hand, plant and machinery, furniture and fittings,bank balance, debtors, bills receivable, stock of goods, investments,Goodwill are examples for assets. Assets can be classified into tangibleand intangible.

Tangible Assets: These assets are those having physicalexistence. It can be seen and touched. For example, plant & machinery,cash, etc.

KULDEEP MATHURM.B.A. JIWAJI UNIVERSITY GWALIOR

Intangible Assets: Intangible assets are those assets having nophysical existence but their possession gives rise to some rights andbenefits to the owner. It cannot be seen and touched. Goodwill,patents, trademarks are some of the examples.

1.1.5 LiabilitiesLiabilities refer to the financial obligations of a business. Thesedenote the amounts which a business owes to others, e.g., loans from banks or other persons, creditors for goods supplied, bills payable,outstanding expenses, bank overdraft etc.

1.1.6 DrawingsIt is the amount of cash or value of goods withdrawn from thebusiness by the proprietor for his personal use. It is deducted fromthe capital.

1.1.7 DebtorsA person (individual or firm) who receives a benefit withoutgiving money or money’s worth immediately, but liable to pay infuture or in due course of time is a debtor. The debtors are shownas an asset in the balance sheet. For example, Mr.Arul boughtgoods on credit from Mr.Babu for Rs.10,000. Mr.Arul is a debtorto Mr.Babu till he pays the value of the goods.

1.1.8 CreditorsA person who gives a benefit without receiving money or money’sworth immediately but to claim in future, is a creditor. The creditorsare shown as a liability in the balance sheet. In the above exampleMr.Babu is a creditor to Mr.Arul till he receive the value of thegoods.

1.1.9 PurchasesPurchases refers to the amount of goods bought by a businessfor resale or for use in the production. Goods purchased for cash arecalled cash purchases. If it is purchased on credit, it is called ascredit purchases. Total purchases include both cash and creditpurchases.

1.1.10 Purchases Return or Returns OutwardWhen goods are returned to the suppliers due to defective qualityor not as per the terms of purchase, it is called as purchases return.To find net purchases, purchases return is deducted from the totalpurchases.

KULDEEP MATHURM.B.A. JIWAJI UNIVERSITY GWALIOR

1.1.11 SalesSales refers to the amount of goods sold that are already boughtor manufactured by the business. When goods are sold for cash, theyare cash sales but if goods are sold and payment is not received atthe time of sale, it is credit sales. Total sales includes both cash andcredit sales.1.1.12 Sales Return or Returns InwardWhen goods are returned from the customers due to defectivequality or not as per the terms of sale, it is called sales return orreturns inward. To find out net sales, sales return is deducted fromtotal sales.

1.1.13 StockStock includes goods unsold on a particular date. Stock may beopening and closing stock. The term opening stock means goodsunsold in the beginning of the accounting period. Whereas the termclosing stock includes goods unsold at the end of the accountingperid. For example, if 4,000 units purchased @ Rs. 20 per unitremain unsold, the closing stock is Rs.80,000. This will be openingstock of the subsequent year.

1.1.14 RevenueRevenue means the amount receivable or realised from sale ofgoods and earnings from interest, dividend, commission, etc.

1.1.15 ExpenseIt is the amount spent in order to produce and sell the goodsand services. For example, purchase of raw materials, payment ofsalaries, wages, etc.

1.1.16 IncomeIncome is the difference between revenue and expense.

1.1.17 VoucherIt is a written document in support of a transaction. It is a proofthat a particular transaction has taken place for the value stated in thevoucher. It may be in the form of cash receipt, invoice, cash memo,bank pay-in-slip etc. Voucher is necessary to audit the accounts.

1.1.18 InvoiceInvoice is a business document which is prepared when one sellgoods to another. The statement is prepared by the seller of goods.It contains the information relating to name and address of the sellerand the buyer, the date of sale and the clear description of goodswith quantity and price.

KULDEEP MATHURM.B.A. JIWAJI UNIVERSITY GWALIOR

1.1.19 ReceiptReceipt is an acknowledgement for cash received. It is issuedto the party paying cash. Receipts form the basis for entries in cashbook.

1.1.20 AccountAccount is a summary of relevant business transactions at oneplace relating to a person, asset, expense or revenue named in theheading. An account is a brief history of financial transactions of aparticular person or item. An account has two sides called debit sideand credit side.

In the traditional approach, all the accounts are classified into thefollowing three types.

1. Personal Accounts 2. Real Accounts 3. Nominal Accounts

Golden Rules for Debit and Credit:

1. Personal Accounts – a) Debit the receiverb) Credit the giver

2. Real Accounts – a) Debit what comes inb) Credit what goes out

3. Nominal Accounts – a) Debit all expenses and lossesb) Credit all incomes and gains