Basic Terms in Accounting
- Entity: It means a reality that has a definite individual presence or existence. Business entity implies an explicitly recognizable business enterprise like Super Bazaar, Hire Jewellers, ITC Limited, and so on. An accounting framework is constantly devised for a specific business entity (additionally known as accounting entity).
- Transaction: An event or an occasion involving some value between at least two or more entities. It tends to be a purchase of goods, receipt of money, installment or payment to a bank or creditor, incurring expenses, and so on. It can be a cash exchange or transaction or a credit exchange or transaction.
- Assets: Assets are monetary and economic resources of a venture or an enterprise that can be usefully communicated or expressed in money related terms. Assets are things of significant worth utilized by the business in its tasks and various operations. For instance, Super Bazar owns an armada of trucks, which is utilized by it for delivering groceries; the trucks, subsequently, give financial advantage to the enterprise.
- Liabilities: They are the obligations or debts that a venture or an enterprise needs to pay sooner or later in the future. They represent creditors claims on the association’s assets. Both small scale and large scale businesses think that it’s necessary and important to get money at one time or the other, and to buy goods using a loan.
- Capital: Amount which is put in or which is invested by the owner or the proprietor of the firm or an organisation while commencing the business is known as capital. It might be brought in the form of cash or assets by the owner for the business entity capital. It is an obligation and a claim on the advantages or assets of the business. Hence, it is consequently, shown as capital on the liabilities side of the balance sheet.
- Sales: Sales are complete incomes or the total revenues from the goods and services which are sold or which are provided to the clients or the customers. Sales might be cash sales or credit sales. When the goods are sold for cash it is known as cash sales. Whereas, when the goods are sold on credit they are known as credit sales.
- Revenues: This refers to the amounts of the business earned by selling its products or giving services to customers or clients and it is known as sales revenue. Other items of revenue or income which are common to numerous organizations and businesses are: commission, interest, profits, dividends, royalties, lease received, and so forth.
- Expenses: Expenses which are incurred by a business during the process of earning revenue are known as expenses. Mostly, expenses are estimated by the cost of assets consumed or services utilized during an accounting period. Some typical items of expenses are: devaluation or depreciation, lease, rent, compensation, salaries, interest, cost of water and electricity, telephones and so on.
- Expenditure: The sum which is paid for expanding or for increasing profit earning capacity of business is called expenditure. purchasing of goods, machinery, furniture, and so forth are some examples of expenditure. If the benefit of the expenditure is exhausted within a year, it is then treated as an expense.
- Profit: The excess or abundance of incomes and revenues of a period over its related costs and expenses during an accounting year is known as profit. It increases the investments of the owners or proprietors.
- Gain: It is a financial receipt as a result of business exchange or transactions. The excess of income or revenue over the costs and various expenses is called gain.
- Loss: At the point when costs and expenses incurred are more than the income or the revenue generated, then this abundance or excess of costs/expenses is known as loss. This decreases the capital of the business.
- Discount: Concessions or a rebate permitted by a businessman to its clients or customers are known as a discount. it might be of two sorts:–
- Trade discount: At the point when a trader permits a concession or rebate to its clients/customers on the list value, it is known as a trade discount. It isn’t recorded in the books. It is shown in the invoice.
- Cash discount: At the point when a trader permits a concession or rebate to the client/customer to make payments in cash or with a money order/cheque, it is known as cash discount. It is recorded in the books and when a cash discount is permitted, then the client/customer is needed to pay the less due amount, so it urges the client/customer to pay as ahead of time as possible.
- Voucher: The written document through which money related exchanges or financial transactions are recorded in the books are known as voucher.
- Goods: The things which are purchased and sold by business are known as goods. In accounting, when goods are bought it is stated as purchases. At the point when goods are sold it is stated as sales. It is stated as a stock if it stays unsold toward the end of the year.
- Drawings: The amount of money or goods which is pulled back or withdrawn by the the owner or proprietor from business for its private uses is known as drawings. It diminishes the capital of the business.
- Purchases: Goods which are bought for resale are called purchases. This might be in the form of raw material or in the form of finished goods. Buying of assets isn’t called purchases as assets are not bought for resale.
- Stock: These are those goods/products which are left unsold in the business towards the end of the year. These goods/products unsold towards the end of the accounting years are known as closing stock. The same stock is called the opening stock towards the start of the new accounting year.
- Debtors: The individual, firm or an association who takes goods and services using a loans or credit from the business are known as debtors of the business. Therefore, the individual, firm or an association who owes cash or Money’s worth to the business is known as a debtor.
- Creditors: The individual, firm or an association from whom goods and services are bought on credit by the business are known as creditors or lenders of the business. Also the business owes money to them. The sum payable to creditors or lenders is a liability of the business.
Role of Accounting: For quite a long time, the role and functions of accounting has been changing with the progressions in economic development and increasing social and cultural demands. It depicts and examines a mass of information or data of an enterprise through measurement, classification and summarisation and also reduces those dates into reports and statements, which shows the financial condition and consequences of activities and operations of that enterprise.
Henceforth, it is viewed as a language of business. It likewise performs the administration and service activity by giving quantitative financial data that helps the users in various manners. Accounting as a data framework system collects and communicates economic data about a venture or an enterprise to a wide variety of interested individuals and parties. In any case, accounting data relates to the past exchanges/transactions and is quantitative and financial in nature, it doesn’t give qualitative and non-financial data. These limitations of accounting must be kept in view while utilizing the accounting data.
Chapter 1 – Introduction to Accounting
- Meaning of Accounting
- Accounting as a Source of Information
- Objectives of Accounting
- Basic Terms in Accounting