REVISION EXERCISE 1

LEARNING OUTCOMES:

REVISION OF THE BASIC TERMINOLOGY USED IN ACCOUNTING.

INTRODUCTION (CLICK BELOW FOR THE AUDIO)

INTRODUCTION

Hello Boys,

 With four chapters completed in a row and two class assessment tests  taken, we stop here ,for a while ,to take a deep breath.

Accountancy is a practical subject. To start with the language of accounting, we need to understand, few accounting terminologies and the accounting principles clearly.

So, let's revise the major accounting terms and accounting principles. 
I have taken vital accounting terms, explaining once again using examples.

 *Point to be Noted*

 All accounting terminologies have to be understood from the point of view of the business.
 Let's recall

 BUSINESS ENTITY PRINCIPLE: 
The owner of a business is always considered as distinct and separate from the business he owns.

 BUSINESS unit should have a completely separate set of books and we have to record business transactions from the firm's point of view and not from the point of view of the proprietor.
 The proprietor is treated as a creditor of the business to the extent of capital invested by him in the business. 
The capital is treated as a liability of the firm because it is assumed that the firm has borrowed funds from its own proprietors instead of borrowing it from outside parties.

BUSINESS TRANSACTION, CAPITAL, DRAWINGS, LIABILITIES (CLICK BELOW FOR THE AUDIO)

BUSINESS TRANSACTION, CAPITAL, DRAWINGS, LIABILITIES

1. Business transactions are such transactions that bring about a change in the financial position of the firm. It involves exchange of goods or services for money consideration. This transaction may be for Cash or Credit.

Example:
1. Placed an order for goods of rupees 5000 to Ram.
The above transaction does not involve any exchange of goods or services or money. Only the order has been placed verbally. Therefore, Its not a business transaction

2. Placed an order for goods of rupees 5000 to Ram and sent an advance of rupees 2000 for the same.
The above transaction is a business transaction as it involves the exchange of money.

2. Capital

Is the amount invested by the owner in the business.
Capital is the account of the proprietor (owner) in the business. Now you know that Business and Businessman are separate beings, so therefore, from the eyes  or point of view of the business, the proprietor is the creditor to the business.
Or
Capital is the liability of the Business towards the owner.
Example Mr Anil started business with rupees 100000
In the above transaction rupees 100000  is a liability of the business towards the proprietor Mr. Anil.

3.Drawings: 

When the proprietor withdraws the money from the business, the liability of the business towards the proprietor decreases.

Example Mr Anil withdrew rupees 10000 from the business for his personal use
The above example explains that the liability of the business towards Mr Anil has reduced by rupees 10,000. It now stands as at rupees 90000.

4. Liabilities:

 Are obligations or debts that the business owes to outsiders, other than the proprietor.

Example: Business takes loan from the bank for rupees 150000
The above transaction says that the loan taken by the business from the bank , is the liability of the business towards the bank.

The liabilities can be of two types:

 Non-current Liabilities and Current Liabilities 

Non-current liabilities 

Are the liabilities which are usually payable after a period of one year.

Example: loan taken from the bank for Rs. 150000 for 5 years is a long term liability or called non current liability.

Current liabilities

Refer to the liabilities which are payable within a period of one year.

Example: goods purchased on credit from Mohan worth rupees 3000.

The above example says that Mohan has supplied goods of rupees 3000 to the business and the payment will be made by the business within the period of 1 year. It's a short term liability or a current liability.

ASSETS, EXPENDITURE, REVENUE, EXPENSE, INCOME / PROFIT, GAIN (CLICK BELOW FOR THE AUDIO)

ASSETS, EXPENDITURE, REVENUE, EXPENSE, INCOME/ PROFIT, GAIN

5. Assets:

 Are the value owned (expressed in terms of money) things which give benefit to the business. Or you can say what business Owns is the Asset.

Example: furniture,machinery,motor vehicle ,land ,debtors, stock ,cash, bank balance.

All the above stated examples have monetary value and it gives benefit to the business. It is owned/  possessed by the business. 

Assets are also of two types:

Non current assets and Current assets.

Non current assets/ Fixed assets : 

Are those assets which are held for long term use in the business and are not meant for resale.

From the above examples, furniture, machinery, motor vehicle, land are non current assets as they give the benefit over a long period of time and they are not meant for resale.

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

From the above examples
debtors ..debtors are those persons to whom the goods have been sold on credit. So they owe to the business. They are converted into cash within one year.

Similarly stock is also realised or sold within one year.

cash, bank balance are any case liquid, they can change during the year.

Then 

Non current assets / fixed assets 

can also be classified as:

Tangible Assets and Intangible assets.

Tangible assets

Refer to those assets which can be seen and touched. like land, plant and machinery, Land etc. Intangible assets are those assets which cannot be seen or touched.

 For example Goodwill, Patents trademarks, computer software etc.

6. Expenditure:

Refers to the amount spent or liability incurred for acquiring assets, goods or services.

 Expenditure can be further classified as Capital Expenditure or Revenue Expenditure.

Capital expenditure

Refers to an expenditure that leads to the acquiring of assets which increases the value of the existing fixed assets.

Example: machinery land building, furniture, computers etc.

These expenses give benefit over a long period of time. They are not day to day expenses. These are non recurring expenses. They are called capital expenditure

.
Revenue expenditure 

Refers to an expenditure incurred during an accounting period and the benefit of which is also exhausted within the same accounting period.

For example salary, rent,electricity charges etc.

Such expenses do not result in an increase in the earning capacity of the business but only helps in maintaining the existing earning capacity. They are maintainable expenses.These are day to day expenses or recurring in nature.

7.Revenue:

Is the total inflow of the money coming into the business.

Expense:  

Is the cost incurred by the business in the process of earning revenue.

Income/ Profit:

Iis the surplus of revenue over expense. Is the excess of total revenues over total expenses of a business enterprise for an accounting period.

Example: 

Business A. limited sold goods to Shyam costing rupees 5000 for rupees 8000.

 In the above transaction: revenue is rupees 8000,
expense is rupees 5000 and
income or profit is rupees 3000.

8. Gain :

It is a monetary benefit, profit or advantage resulting from events or transactions which are incidental to business such as sale of fixed assets, winning a court case for appreciation in the value of an asset. 

For example if a building costing rupees 10 lakh is sold for rupees 12 lakh. Rupees 2 lakh will be the gain on sale of building.

PURCHASES, SALES, STOCK (CLICK BELOW FOR THE AUDIO)

PURCHASES, SALES, STOCK

9. Purchases: 

The term purchases is used only for the purchase of 'Goods' in which the business deals.
 Goods are those things which are purchased for resale,the purpose is to make a profit. 

Or
Goods refer to the products in which the business unit is dealing, that is goods mean all the items which are purchased and sold in the ordinary course of business.

For example, if a cloth dealer purchase cloth for sale, the clothes were purchased will be called goods. However if the same cloth dealer purchase furniture for seating the customers, such furniture will not be termed as goods, but it will be an asset and a separate account name furniture account will be opened for it.
  where,

The furniture purchased by a furniture dealer is called Purchases.

Building purchased by a property dealer is called it's goods i.e. its Purchases.
Whereas, 

building purchased by any other business house will be termed as Buildings account, as the Asset of the business.
Therefore, Purchases would be used only  of goods in which the business deals and are meant for resale. 

The term purchases includes both cash purchases and credit purchase of goods
  
10. Sales: means transfer of ownership of goods or services to customers for a price.
For example: if a cloth dealer sells cloth, it will be termed as sales but if the same cloth dealer sells old furniture, it will not be termed as sales but the sale of an asset.
The term sales include both cash and credit sales.

11. Stock: 

It is the value of the goods which are purchased for reselling and are now lying unsold at the end of the accounting period.

The stock maybe of two types:

Opening stock and the Closing stock. Opening stock means the value of goods lying unsold in the beginning of the accounting period. 

whereas,

 the Closing stock means the value of the goods lying unsold at the end of the accounting period.