Basic Terms of Accounting

In the previous chapter, we let you know, what the term Accounting means. You got to know the meaning, definition, evolution, characteristics, scope, and systems of accounting. Before studying the next topic of accounting, we need to first understand the basic terminologies of accounting. So, the objective of this chapter is to make you familiarize you with some of the common terms of accounting. So, let's begin with the first term.

Basic Accounting Terms

1. Capital - Capital is the amount, initially, invested while commencing the business. It can be in the form of cash, goods, or any type of asset.

Even after commencement, additional capital can be introduced. The additional introduction of capital can be done in case of expansion of business.

Profit earned in the business is added to the capital. The loss made in the business is reduced from the capital. So, if the business is profitable, capital would be on increase, year after year. In case of continuous losses, capital would be on a decrease, year after year.

The term 'Capital' is defined as the excess of Assets over Liabilities. Capital = Assets - Liabilities, For Example - If a firm has, Assets of Rs. 100000, and Liabilities of Rs 20000, how much is the capital of the firm? (100000-20000) = 80000

Now, suppose the firm has made a profit of Rs 40000, now how much is the capital of the firm? (100000 - 20000 + 40000) = 120000

Video - Basic Terms of Accounting

2. Drawings - Drawings are the amount withdrawn from the business by the proprietor, or by the partners in a partnership firm. It can be in form of cash or goods.

Drawings are reduced from the Capital amount. For example- The proprietor has withdrawn Rs 5000 and Goods of Rs 5000 for personal use. Now, how much is the amount in the Capital Account.? (100000 - 20000 + 40000 - 10000) = Rs110000

3. Turnover -The total amount of sales during a particular period is called 'Turnover'. It can be in form of cash, credit, or both.

4. Discount - The allowance or concession is granted to a retailer by the dealer or wholesaler is called 'Discount'.

It can be of two types - Trade Discount, and Cash Discount.

Trade Discount - Trade discount is allowed by a dealer to the retailer or buyer to induce him to buy more from him. It can be offered on both - cash sales and credit sales.

The invoice shows the list price or retail price. Where trade discount is allowed, the same is also shown in the invoice. Trade discount is allowed as a fixed % on the list price. Net price is calculated as (Net Price = List Price - Trade discount)

It is important to note that the net price is entered as sale value by the seller in the accounts. Equally, the net price is entered as the purchase amount by the buyer in the accounts. Or we can say, no entry is made for trade discount, separately, in books of accounts of the seller and buyer. But, it has to be mentioned in the narration about the trade discount given on the list price.

Cash Discount - Cash discount is allowed by the seller to encourage the customer to make early payments before the credit period expires. Cash discount comes into the picture as and when credit sales are made. There is no cash discount given on cash sales. For the seller, it is recorded as 'Discount Allower', and for the buyer, it is recorded as 'Discount Received'.

5. Debtor or Book Debt - The person to whom goods or services are sold on credit is called ‘Debtor’. The amount due from the debtor is called Book Debt. Another name is ‘Accounts Receivable’.

6. Creditor - The person from whom goods or services are purchased on credit, is called 'Creditor' till the payment due to him is made.

7. Bad Debts - Amount that cannot be recovered from a debtor is called ‘Bad Debt’. Bad debts result in the reduction of profits of the firm. Bad debts are charged to the Profit and Loss account. In other words, bad debts are treated as an expenditure, as the amount due to be received would no longer be received.

8. Transaction - Transaction refers to an exchange of goods and services. The exchange of the dealing has to be expressed in terms of money. The transaction can be either for cash or on credit. If the payment is made immediately to the transaction, it is called a cash transaction. If the payment is postponed or deferred for a future date, then it is called a credit transaction.

9. Voucher - A voucher is a written document or paper containing the details of the transaction. The person who prepares the voucher, normally an accountant, signs it. A person who verifies or checks the transaction also signs it, in token of its verification. Vouchers are important instruments for future reference. A voucher can be a debit voucher or a credit voucher. A voucher is, normally, accompanied by the supporting documents as proof. For example, a voucher may be supported by the bill. Here, the bill is the evidence of payment.

10. Assets - Assets are the properties (tangible or intangible) owned by an entity or enterprise. They are the economic resources of the business. Anything which will enable the firm to get economic benefit in the future is an asset. For example- Land, building, machinery, furniture, stock are tangible assets, and trademark, copyright, goodwill, are intangible assets.

According to Finney and Miller, "assets are future economic benefits, the rights, which are owned or controlled by an organization or individual."

According to R. Brockington , "assets are property or legal rights owned by an individual or a company to which money value can be attached."

According to Prof. R.N. Anthony, "assets are valuable resources owned by a business which are acquired at a measurable money cost."

on the basis of the above definitions, we can say:-

1. Assets should be owned by the business,

2. Assets may be in tangible form or intangible form,

3. Assets should have some value attached to them,

4. Assets should be capable of being measured in terms of money.

Assets can be divided into two categories - Fixed Assets and Current Assets

Fixed assets are the assets owned by the organization for the purpose of conducting business, using the fixed assets. Like- Land, Building, Machinery, etc.

Current Assets are those assets, which are held by the organization for the purpose of carrying on the business. Current assets, normally, change their form. Like- cash, bank, finished goods, debtors, etc.

11. Liabilities - Liabilities are the amounts that are payable. Advances or loans received have to be repaid. To the date of repayment, they are liabilities. Goods or services, when bought on credit, are shown as creditors, which are also liabilities.

Capital invested by proprietor or partner is also a liability as the business firm is independent of them, so far as accounting is concerned. This is the reason why capital is shown on the liability side of the balance sheet. Capital, loan, outstanding expenses, and bills payable are some of the examples of liabilities.

12. Debit - The entry made on the debit side of the account is called ‘Debit’. The abridged form is ‘Dr’.

13. Credit - The entry made on the credit side of the account is called ‘Credit’. The abridged form is ‘Cr’.

14. Entry - The record made in the books of accounts in respect of a transaction or an event is called an entry.

15. Books of Account - The registers or books maintained by any business firm or institution for recording the business transactions are called “Books of Account”.
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