Chapter 2. Basic Accounting Terms

Dear Students,

After the  completion of Simple, purely Theoretical Chapter  number 1 and 3 with Summarised, Concised, Self Explanatory Notes given in Proper Points and Examples with Audio files Attached to Each Heading.

Now we move on to our next Chapter 2.

Chapter 2 

Basic Accounting Terms 

Learning Objectives:

*Introduction 

*Important Accounting Terms

# Business Transaction     

# Capital   

# Drawings   

# Liabilities  

# Assets  

# Expenditure 

# Expense   

# Income  

# Profit   

# Gain 

Introduction: 

There are certain basic Accounting Terms, which are widely used in the business world. Before recording the transactions in the books, it is necessary to understand these terms as they have specific meaning in accounting. These basic terms are known as Accounting Terminology.

1. Business Transaction:  is an economic activity of the business, which changes its financial position. The business transaction may change the financial position in terms of change in values of asset , liability or capital.

Some examples of Business Transactions are: 

. Introduction of capital by the owner into the business 

. Withdrawal of cash from business by the owner for personal use

. purchase of goods or asset for cash or on credit 

. sale of goods or asset for cash or on credit 

. payment made to suppliers cash received from a customer 

. payment of expenses in the form of salary, rent etc.

. income received in the form of interest, commission, etc.

Examples:  Events which are not Business Transactions, these events do not bring about a change in the financial position of the business. 

. receipt of order for supply of goods

. appointment of an employee 

. submission of a tender for a construction work 

. Sent a fax message to the supplier

.  received a quotation from a supplier 

. general manager resigned from the organisation 

interview of a prospective employee

Click here on the link for the Audio:

Introduction & Business Transactions

2. Capital: Capital is the amount invested by the owner in the business. It may be brought in the form of money or assets having a monetary value. 

According to 'Business Entity Concept,  business is considered to be a separate and distinct from its owners.  So,  capital is a liability of the business towards the owner.

 Capital increases with the additional or fresh capital and the amount of profit earned. On the other hand, it reduces when the owner makes  drawings or loss is incurred by the business.

 Capital is the excess of assets over the liabilities, i.e. Capital = Assets minus Liabilities 

 Capital is also known as Owner's Equity or Net Worth or Internal Liability or Proprietor's Fund.

3.Drawings: Withdrawal of money and /or goods by the owner from the business for personal use is known as drawings.

  Drawings reduces the investment or capital of the owners.

  Drawings also include any personal expense of the owner paid by the business. 

For example, payment of life insurance premium, payment of income tax etc.

4. Liabilities: Liabilities are obligations or debts that an enterprise has to pay at some time in the future, i.e. it is the amount owed by the business.

 . The amount payable to the owner is termed as Internal liability or Owner's Equity and 

 . The amount payable to the outsiders is termed as External Liability. For example, Creditors, Borrowings etc.

 Liability can be further classified as:

 Non-current Liability :  It refers to the liability, which is usually payable after a period of 1 year.  For example,  Long term Loan, Debentures or Bonds, etc. 

 Current Liability:  It refers to a liability,  which is payable within a period of 1 year. For example,  Creditors, Bills Payable, Bank Overdraft etc.

Click here on the link for the Audio:

Capital, Drawings, Liabilities

5. Assets: Asset are economic resources of an enterprise, which can be expressed in terms of money. Assets are valuable resources owned by a business which are required at a measurable money cost.

 For example, land, building, plant and machinery, furniture, stock, cash and bank balance, debtors, etc

 Assets can be further classified as: 

 . Current Assets:  Current assets are those assets which are held by the business with a purpose of converting them into cash within one year.

 For example, sale of goods - decrease the stock and increases the cash. in this way, goods are converted into cash. 

 Examples of Current assets are:  cash in hand, bank balance, bills receivables, debtors, prepaid expenses, etc. 

 Current assets are also known as floating assets or circulating assets.

. Non current Assets: Non-current Assets are those assets which are held for long term use in the business and are not meant for resale.

. These assets are held for the purpose of producing goods or services in order to earn revenue and to increase profit earning capacity of the business. 

Examples of Non-current Assets are: Fixed Asset ( tangible and intangible),   non current investments long term loans and advances etc.

Fixed assets : Fixed Assets are those Non Current Assets which are held for use in the business and are not meant for resale. Fixed ass6ets are further classified as:

. Tangible Assets:  Tangible Assets refer to those assets which have physical existence that is they can be seen and touched. For example plant and machinery, land and building, furniture etc.

Intangible Assets: Intangible Assets are those assets which do not have a physical existence, i.e. they cannot be seen or touched. For example,  Goodwill ,Patents , Trademarks Computer Software etc.

Fictitious Assets:  Fictitious Assets are those assets which neither have any real value nor have any physical form, but are called Assets on the basis of legal grounds. These assets are neither tangible assets nor intangible assets. For example, Advertisement Suspense Account, Discount on issue of debentures, Underwriting Commission,  Preliminary expenses etc.

Click here on the link for the Audio:

Assets


6.Expenditure: Expenditure refer to the amount spent or liability incurred for acquiring assets, goods or services. For example, payment of rent, salary, purchase of goods, purchase of land, machinery etc.

Expenditure can be further classified as:

Capital Expenditure: It refers to an expenditure incurred for acquiring or increasing the value of existing fixed assets. For example, purchase of building or furniture, installation of machinery, etc. Capital expenditure yeilds benefit over a long period of time.

Revenue Expenditure: It refers to an expenditure incurred during an accounting period and the benefit of which is also exhausted within the same accounting period. For example, purchase of goods and services, payment of salary, rent advertisement, etc. 

Revenue expenditure does not increase the earning capacity of the business, but are incurred to maintain the existing earning capacity.

7. Expense:  Expense is the cost incurred by a business in the process of earning revenue. For example, salaries, wages, rent, commission, etc. 

Generally, expenses are measured by the cost of assets consumed or services used during an accounting period, i.e. expense is the value which has expired during the accounting period.

Click here on the link for the Audio:


Expenditure, Expenses

8. Income: Income is the surplus of revenue over expenses, i.e. it is the profit earned during a period. For example, suppose goods costing Rs. 50000 are sold for Rs 70,000. In this case the amount received from the sale of goods of Rs 70,000 is the revenue and the cost amounting to rupees 50000 is expense and the difference between the two, i.e. Rs. 20000 is the income. So income is expressed as:  Income = Revenue minus Expense. Income is also known as profit.

9. Profit: Profit is the excess of total revenues over total expenses (cost) of a business enterprise for an accounting period.

10. Gain :  Gain is a monetary benefit, profit or advantage that arises from transactions, which are incidental to business. Gain is a profit of irregular nature. For example, suppose a machinery having book value of Rs 40000 is sold for Rs 50000, then the surplus of Rs 10000 is a gain.

Click here on the link for the Audios:

Income, Profit, Gain

Conclusive notes