Basic_Accounting_Terminology

Basic Accounting Terminology 1. Transaction: It is transfer of money or goods or service from one person or account to another person or account. 2. Cash transactions: cash is paid or received immediately. 3. Credit transactions: is one where there is a promise to pay/receive cash at a future date. assets etc.), 4. Capital: Funds brought in to start business, by the owner/s. In the case of a company, capital is collected by issue of shares. 5. Share: A share in a company is one of the units into which the total capital of the company is divided. 6. Assets: An asset is a resource legally owned by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. Eg: Land and buildings, plant and machinery, furniture and fixtures, cash in hand and at bank, debtors and stock etc., are regarded as assets. Assets are classified based on the purpose for which an asset is held in the hands of the user. Assets may be fixed, current, liquid or fictitious. 7. Fixed assets are those which are held for use in the production or supply of goods and services and not for resale in the normal course of business. Eg. Land, Plant and Machinery are fixed assets. The exception to it is, for a land developer, land is considered as current asset because he is involved in buying and selling of land. 8. Current assets are those which are held or receivable within a year or within the operating cycle of the business. They are intended to be converted into cash within a short period of time. Ex: Stock in trade, debtors, bills receivable, cash at bank etc. 9. Liquid assets are those which can be easily converted into cash and for instance, cash in hand, cash at bank, marketable investments etc. 10. Fictitious assets are in the form of such expenses which could not be written off during the period of their incidence. For example, promotional expenses of a company which could not be treated as expenditure in the year of incidence are shown as fictitious assets. 11. Liability: It is a financial obligation of an enterprise arising from past event the settlement of which is expected to result in an outflow of resources embodying economic benefit. Eg. Loans payable, salaries payable, term loans. 12. Current liability is that obligation which has to be satisfied within a year. For example, payment to be made to sundry creditors for the goods supplied by them on credit; bills payable accepted by the businessman; overdraft raised by the businessman in a bank etc. 13. Equity: Equity is the residual interest in the asset of the enterprise after deducting all its liabilities. The equity of a company is called shareholders’ equity. Its components include share capital, share premium and retained earnings. 14. Partnership: It is a relationship between partners to contribute capital to start business, agree to distribute profits and losses in an agreed proportion. It is a business being carried on by all or any one acting for all. Partnership firm refers to business whereas the partnership refers to relationship caused by agreement. 15. Joint Stock Company: It is an organization, for which the capital is contributed by shareholders to carry on business and it is registered under Companies Act and it has a legal entity, having perpetual existence and a common seal. 16. Goods: Goods refer to merchandise, commodities, products, articles or things in which a trader deals. It represents commodities or things meant for resale. Goods account is divided into six heads viz: purchases account, sales account, purchases returns account, sales returns account, opening stock account and closing stock account. Let us get the meaning of each one. * Purchases: Goods purchased by a business are called purchases. * Sales: Goods sold by a business are called sales. * Purchases Return or Returns Outward: Goods returned by a business to its suppliers out of the purchases already made from them are called purchase returns. * Sales Returns or Returns Inward: Goods returned to a business by its customers out of the sales already made to them are called Sales Returns. * Opening Stock: Unsold goods lying in a business at the beginning of a year, are called opening stock. * Closing Stock: Unsold goods lying in a business at the end of a year, are called closing stock. 17. Inventory: Inventory refers to goods held by a business for sale in the ordinary course of business or for consumption in the production of goods or service for sale. It includes stock of raw materials, stock of work in – progress and stock of finished goods. 18. Drawings: It refers to cash, goods or any other asset withdrawn by the proprietor from his business for his personal or domestic use. In short, amounts the owner withdraws from his business for living and personal expenses. 19. Debtor: A debtor is a person who owes money to the business. A debtor may be of 4 types. * Trade debtor is a person who owes money to the business for the goods supplied to him on credit. * A loan debtor is a person who owes money to the business for the loan advanced to him. * Debtor for asset sold is a debtor who owes money to the business for any asset sold to him on credit. * A debtor for service rendered is a debtor who owes money to the business for the service rendered to him on credit. 20. Debt: the amount due from a debtor to the business is called a “Debt”, generally debt may be of three types: * Good debt refers to fully recoverable debt. * Bad debt refers to debt, which is not recoverable (irrecoverable). * Doubtful debt refers to debt whose recovery is doubtful. 21. Creditors: A creditor is a person to whom the business owes money. A creditor also may be of 4 types. * Trade creditor is a person to whom the business owes money for goods purchased from him on credit. * Loan creditor is a person to whom the business owes money for the loan borrowed from him. * Creditor for asset purchased is a creditor to whom the business owes money for any asset purchased from him on credit. * Expenses creditor refers to a creditor to whom the business owes money for any service received from him on credit. For e.g.: salaries unpaid, commission unpaid etc. 22. Debentures Financial instruments issued by companies in the capital market to raise debt.