Basic Accounting TermsBasic Accounting TermsAssetsAssets : : Whatever business owns, is treated as Whatever business owns, is treated as

assets. It can be classified as assets. It can be classified as

Fixed Asset : Like land, building, machinery Fixed Asset : Like land, building, machinery

Current Asset : Like goods, bank balance , Current Asset : Like goods, bank balance ,

cash, debtors , bills receivable.cash, debtors , bills receivable.

Tangible Assets : Physically exists.Tangible Assets : Physically exists.

Intangible Assets: Physically does not existsIntangible Assets: Physically does not exists

Wasting Assets :Consumable during the use likeWasting Assets :Consumable during the use like mines, quarries etc. mines, quarries etc.

Liabilities:Liabilities: Mean the amount which business owes to Mean the amount which business owes to

outsiders.outsiders. It can be classified as It can be classified as

Long Term Liability : Payable after a long term like long Long Term Liability : Payable after a long term like long

term loan, debentures, etc.term loan, debentures, etc.

Current Liability : Payable in near future like creditors, Current Liability : Payable in near future like creditors,

bank o/d , short term loan, bill bank o/d , short term loan, bill payable, payable,

etc.etc.

Capital : Capital : The amount (money) which has been invested by The amount (money) which has been invested by

the proprietor in the business.the proprietor in the business.

CAPITAL = ASSETS – LIABILITIESCAPITAL = ASSETS – LIABILITIES

Expenses: Expenses: The amount spent to produce n sell the goods and The amount spent to produce n sell the goods and

services.services.

Income : Income : Profit earned during a period of time.Profit earned during a period of time.

INCOME = REVENUE – EXPENSEINCOME = REVENUE – EXPENSE

Expenditure: Expenditure: Amount spent or liability incurred for the value Amount spent or liability incurred for the value

received. It may be of two typesreceived. It may be of two types

Capital Expenditure: Amount spent in purchasing the Capital Expenditure: Amount spent in purchasing the

assets.assets.

Revenue Expenditure: Amount spent in purchasing the Revenue Expenditure: Amount spent in purchasing the

goods and services during the goods and services during the

accounting period. accounting period.

Revenue :Revenue : Amount received by the sale of goods or Amount received by the sale of goods or

services.services.

INCOME = REVENUE - EXPENSES INCOME = REVENUE - EXPENSES

Debtor :Debtor : A person to whom goods has been sold on A person to whom goods has been sold on

credit.credit.

Creditor:Creditor: A person from whom goods has been A person from whom goods has been

purchased on credit.purchased on credit.

Goods :Goods : They are the items which are part of stock-in- They are the items which are part of stock-in-

trade of business, which are purchased and trade of business, which are purchased and are to be resold.are to be resold.

Cost : Cost : Amount spent on manufacturing of article Amount spent on manufacturing of article

,product or activity.,product or activity.

Gains : Gains : Profit earned by sale of the article.Profit earned by sale of the article.

Stock or Inventory:Stock or Inventory: Tangible assets held by the Tangible assets held by the

enterprise for the purpose of sale in ordinary enterprise for the purpose of sale in ordinary course of business.course of business.

Purchases:Purchases: Purchase of goods. Purchase of goods.

SaleSale : : Sale of those goods in which firm deals. Sale of those goods in which firm deals.

Loss :Loss :Excess of expenses over revenue.Excess of expenses over revenue.

ProfitProfit : : Surplus of revenue over expenses. Surplus of revenue over expenses.

DiscountDiscount : : Any type of Reduction in the prices. Any type of Reduction in the prices.

Drawings : Drawings : Amount of money or the value of goods Amount of money or the value of goods

proprietor takes for his domestic orproprietor takes for his domestic or personal use..personal use..

Receivables:Receivables: Amount due from others or amount Amount due from others or amount

receivables from others. (debtors)receivables from others. (debtors)

Payables : Payables : Amount due to others. (Creditors)Amount due to others. (Creditors)

Depreciation :Depreciation : Fall in value of an asset because of usage or Fall in value of an asset because of usage or

with passage of time or obsolescence or with passage of time or obsolescence or

accident.accident.

Cost of Goods Sold :Cost of Goods Sold :Direct cost of goods or services.Direct cost of goods or services.

Bad Debts :Bad Debts : The amount that has become irrecoverable. The amount that has become irrecoverable.

It is a business loss.It is a business loss.

Accounting EquationsAccounting EquationsAsset = Capital + LiabilitiesAsset = Capital + Liabilities

Accounting EquationAccounting Equation

CashBank

Bills Rec.Debtors

Closing StockFurniture

MachineryBuilding

CapitalCreditorsBills Pay.

O/s ExpensesBank O/d

Loan

Assets Assets Are equal toAre equal to Capital + LiabilitiesCapital + Liabilities

Transaction from A/c equation Transaction from A/c equation viewpoint can be divided into two viewpoint can be divided into two

1.1. Transactions Affecting Two Items; andTransactions Affecting Two Items; and2.2. Transactions Affecting More Than Two Items.Transactions Affecting More Than Two Items.Transactions Affecting Two Items:Transactions Affecting Two Items:1.Transactions affecting opposite side :- 1.Transactions affecting opposite side :- a) Increase in asset, increase in liability.a) Increase in asset, increase in liability. b) Decrease in liability, decrease in asset.b) Decrease in liability, decrease in asset. c) Increase in asset, increase in owner’s equity. c) Increase in asset, increase in owner’s equity. d) Decrease in owner’s capital, decrease in d) Decrease in owner’s capital, decrease in

asset. asset.

Transaction affecting same side but in opposite Transaction affecting same side but in opposite direction are:direction are:

a)a) Increase in asset, decrease in another Increase in asset, decrease in another asset.asset.

b)b) Decrease in liability, increase in another Decrease in liability, increase in another liability.liability.

c)c) Decrease in owner’s equity item, Decrease in owner’s equity item, increase in owner’s another equity item.increase in owner’s another equity item.

d)d) Decrease in owner’s equity item, Decrease in owner’s equity item, increase in owner’s another equity item.increase in owner’s another equity item.

e)e) Decrease in liability, increase in owner’s Decrease in liability, increase in owner’s equity item.equity item.

Transaction affecting more than Transaction affecting more than two items:two items:

Some transactions affects more than two Some transactions affects more than two items . Example:items . Example:

Sale of goods worth Rs 30000 in cash.Sale of goods worth Rs 30000 in cash.

Item affected (costing 25000)Item affected (costing 25000)

Increase Cash by Rs. 30,000Increase Cash by Rs. 30,000

Stock Reduce by Rs. 25,000Stock Reduce by Rs. 25,000

Capital increase by Rs 5,000 (Profit added)Capital increase by Rs 5,000 (Profit added)

Derivation of an A/c EquationDerivation of an A/c Equation

An equation can be derived by the following way:An equation can be derived by the following way:

1.1. Ascertain the variables affected by a transaction. Ascertain the variables affected by a transaction. Assets, liabilities, capital, revenues and Assets, liabilities, capital, revenues and expenses.expenses.

2.2. Find out the effect of a transaction on the Find out the effect of a transaction on the variables. Whether increase or decrease.variables. Whether increase or decrease.

3.3. Show the effect on the appropriate side and Show the effect on the appropriate side and ensure the total must be same of both side.ensure the total must be same of both side.

Example 1Example 1

Started business with Rs.1,00,000.Started business with Rs.1,00,000.

1 Variable effected1 Variable effected Assets and Assets and CapitalCapital

2 effect of Transaction 2 effect of Transaction Incr. in Asset and Cap Incr. in Asset and Cap on Affected variable on Affected variable

3 Accounting Equation Assets= Liab.+ Capital3 Accounting Equation Assets= Liab.+ Capital

1,00,000= 0 +1,00,0001,00,000= 0 +1,00,000

Types of AccountsTypes of Accounts

Accounts

Personal Account Real Account Nominal Account

Personal AccountPersonal Account

This A/c are related with Natural Person This A/c are related with Natural Person Artificial personal and Representative.Artificial personal and Representative.

Natural PersonNatural Person : Ram, Rahim, Mohan. : Ram, Rahim, Mohan.

Artificial PersonArtificial Person: Firms, Companies, Banks : Firms, Companies, Banks

etc.etc.

RepresentativeRepresentative: All accounts representing : All accounts representing outstanding expenses and accrued or outstanding expenses and accrued or prepaid incomes are personal accounts.prepaid incomes are personal accounts.

Real AccountReal Account

Tangible Real Account: like furniture , Tangible Real Account: like furniture , Cash, Machinery etc.Cash, Machinery etc.

Intangible Real Account : Like goodwill , Intangible Real Account : Like goodwill , trade mark etc, which cannot be touched.trade mark etc, which cannot be touched.

Nominal AccountNominal Account

The names of head of expenses and The names of head of expenses and income are called nominal account. income are called nominal account. Example: Wages account, salaries Example: Wages account, salaries account, commission account, rent account, commission account, rent account, etc,account, etc,

Rules for Debit and CreditRules for Debit and Credit

Personal AccountDebit the receiver’s account and

credit the giver’s account

Real Account Debit the account of what comes in and credit the account of what goes out.

Nominal Account Debit the account of expenses andCredit the account of income and gains.

Golden Rule of JournalsDebit what comes in and Credit what Goes out.