Basic Accounting Terms ( continued)

Dear Students,

Learning Objectives

*Introduction 

*Important Accounting Terms

# Loss

# Purchases

# Sale

# Goods

# Stock

# Debtor

# Creditor

# Voucher 

# Discount

# Account

Introduction: 

Introduction/ Recapitulation

1. Loss : Loss is the excess of total expenses over total revenue. For example, if revenues are Rs. 90000 and expenses are Rs 120000, the loss will be Rs 30000. Loss decreases the Owner's Equity. The term Loss is also used in another contexts:
• Loss also refers to such activities of the business for which no benefit is received by the firm. For example, loss due to fire or theft.
• Loss also arises from events of non recurring nature, like loss on sale of fixed assets.

Expenses versus losses

. Expense is  incurred to generate revenues, whereas, losses do not. For example, depreciation is an expense, while goods burnt by fire is a loss.
• A firm may take utility/benefit or services in lieu of expenses spent, whereas, the firm may not take any utility/ benefit or services in lieu of loss incurred.
• Expense is spent with willingness, whereas, loss is not incurred with willingness.

2. Purchases: Purchases refer to the amount of goods bought by a business for resale or for use in production.
. In a trading concern, purchases are made for resale with or without processing.
. In a manufacturing concern, raw materials are purchased, processed further into finished goods and then sold.
. The term purchases include both cash purchases and credit purchase of goods.

Purchase Return or Return Outward:  when purchased goods are returned to the seller due to some reason like not according to specifications for due to some defect, then it is termed as Purchase return.

3. Sales: Sales refer to the amount of goods sold that are already bought or manufactured by the business. The term Sales is associated with sale of goods that are dealt with by the firm.
. Sales include both cash sales and credit sales.
. Sale of an asset will not be considered as sales. For example if a business is dealing in furniture, then sale of furniture will be considered as sales, otherwise it will be a sale of an asset.

Sales return or Return Inward : when sale sold goods are returned by the purchaser due to some reason, then it is termed as Sales Return.

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Loss, Purchases, Sales

4. Goods: Goods refers to the products in which the business unit is dealing, i.e. goods mean all the items which are purchased and sold in the ordinary course of business.
The items that are purchased for use in the business are not called goods.
. For example, for a furniture dealer, purchase of chairs and tables is termed as goods, while for others, it is treated as an asset.
. Similarly, for a stationary merchant, stationary is goods, whereas, for others, it is an item of expense and not purchases.

5. Stock : Stock or inventory refers to the goods held by a business for sale in the ordinary course of business or for consumption in the production of goods or services for sale. In other words, value of goods lying unsold or unused at the beginning of the year or at the end of the year is called stock.
Stock may be Opening stock or Closing stock.

Closing stock of this year becomes the Opening stock of the next accounting year.
Stock is a Current asset (Tangible Asset) for the business.
Stock is always valued at cost price or market price, whichever is less, based on 'Principle of Prudence'. We will study this principle in the next chapter.

Types of Stock:
  Stock may be of the following kinds: i. Stock of Raw material
ii. Stock of Semi finished goods or Stock of Work in progress
iii. Stock of Finished Goods

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Goods, Stock

6. Debtor: Debtor is a person or a firm to whom goods have been sold or services rendered on credit and payment has not been received. The  amount due is known as debt. Debtor  are an asset to the business.

7. Creditor: Creditor is a person or a firm from whom goods have been purchased or services have been taken on credit and payment has not been made. The creditors are the liabilities of a business.

8. Voucher: Voucher is a documentary evidence in support of a business transaction. For example, cash memo, invoice, debit note , credit note, etc 

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Debtor, Creditor, Voucher

9. Discount : Discount is any type of reduction in the price by the seller to the buyer. It maybe of two types:

 Trade discount:  Trade discount is the rebate allowed by the seller at a fixed percentage of the list price.
It is generally offered by manufacturers to wholesalers and by wholesalers to retailers.
It is not recorded in the books as it is deducted from the sale price. So, sales are recorded at net value after subtracting the trade discount. Similarly, purchases are recorded by the purchaser at the net value.

Cash discount:  Cash discount is the rebate allowed to the buyer for making prompt payment.
Cash discount acts as an incentive and encourages prompt payment by the debtors.
It is an expense for the person who is allowing the discount and income for the receiving party.
It is always recorded in the books of both the parties.

10. Account is a summarised record of related transactions at one place under a particular head. For example all transactions relating to cash are recorded at one place, known as cash account. An account has two sides: 1. Left side of an account is debit, abbreviated as Dr.

2. Right side of an account is credit, abbreviated as Cr.

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Discount, Account

Concluding Notes