There are certain basic accounting terms which we use on a daily basis in the business world so, before recording the transactions in the books, is essential to understand these terms.
Capital is the amount invested by the owner or proprietor in a business enterprise. It is the amount with the help of which goods and assets are purchased in the business.
Capital can be calculated by subtracting the external liabilities from the sum of fixed and current assets.
CAPITAL = ASSETS - LIABILITIES
2. Drawing
Any amount or value of goods withdraw by the owner for personal use or payments made out of business funds are termed as drawings.
3. Liability
The amount which firm owes to the outsiders of business, or the debts owed to the creditors are termed as liability.
Liabilities may be divided into two parts:
1. Internal liabilities
Amounts which a business enterprise has to pay to the proprietor or owners are internal liabilities such as capital and accumulated profits.
2. External liabilities
Amounts which a business enterprise has to pay to outsiders are known as external liabilities such as creditors, bank overdraft, loans, etc.
Liabilities are classified in further two parts:
1. Non-current liabilities
It refers to those liabilities which are generally paid after one year or which fall due for payment in a longer period.
2. Current liabilities
It refers to those liabilities which are generally paid within one year or which are to be paid in a shorter period.
4. Assets
Anything which is in possession or is in property of a business enterprise including the amounts due to it from others, is called an asset. In other words anything which will enable a business enterprise to get cash or a benefit in future is an asset.
5. Capital receipts and Revenue receipts
Revenue receipts are shown on the credit side of the trading and profile & loss account where as capital receipts are shown in the balance sheet either as increase in liabilities or decrease in the value of assets.
Revenue receipts are small amounts that are recurring in nature. For example, money received from sale of goods, commission and fees received, interest and dividend received on investment, etc.
Capital receipts are big amounts that are non-recurring in nature. For example, amount received for sale of fixed assets, amount received by the loans, etc.
6. Expenditure
Any payment made for the purpose of acquiring assets, or paying any liability is called expenditure. It means any type of payment for the receipt of a benefit is termed as expenditure.
This may be classified intk three categories:
1. Capital Expenditures
Any expenditure which is incurred in acquiring or increasing the value of fixed assets is termed as capital expenditure. It is non-recurring in nature and yeilds benefits over a long period and hence written in assets.
2. Revenue Expenditures
Any expenditure the full benefit of which is received during one accounting period is termed as revenue expenditure. It is recurring in nature.
3. Deferred Revenue Expenditures
The certain expenditures which are revenue in nature but the benefits of which is likely to derived over a number of years.
7. Expenses
It is the cost incurred in producing and selling the goods and services. Expense is the cost of use of things or services for the purpose of generating revenue.
8. Income
The surplus of revenue over expenses is called income.
INCOME = REVENUE - EXPENSES
9. Profit
It is the excess of total revenue over total expenses of a business. Profit is added to the capital thus increases the investment of the owners.
10. 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 or increase in the value of assets.
11. Loss
The term loss can be defined as when the total expenses exceeds the total revenue or the fact or activity for which firm receives no benefit for example, loss due to fire, theft or accident, etc.
12. Purchases
The term purchases is used only for the purchase of goods in which the business deals. Only the dealing goods of the business enterprise are termed as purchases. Purchases includes both cash as well as credit purchases.
Purchase returns : When purchased goods are returned to the suppliers these are known as purchase returns or return outwards
13. Sales
The term sales is used only for those goods which are purchased for resale purposes. Sales means transfer of ownership of goods or services to customers for a price. Sales includes both cash and credit sales.
Sales returns : Some good sold to the customers might return and they are termed as sales returns or return inwards.
14. Goods
Goods include all those things in which the business firm is dealing and which are purchased for the purpose of resale or which are used for producing finished goods. For example, for a stationary shop pens, books and copies are goods where as furniture like table and chairs are assets.
15. Discount
It is a rebate or allowance given by the seller to the buyer. Its is of two types:
(i) Trade discount
The discount given at the time of trading of goods or services by the seller to its customers are termed as trade discount. It is not recorded in the books of accounts as it is deducted in the invoice or cash memo itself from the gross value of goods.
(ii) Cash discount
The cash discount is given to customers for making prompt payment. It generally given to attract customers to pay immediately in cash. It is always recorded in the books of accounts.
16. Trade Receivables
Trade Receivables refers to the amount receivable on account of sale of goods or services rendered by the company in business activities.
It includes both Debtors and Bill Receivables.
Debtors are those persons or firms to whom goods have been sold or services rendered on credit. They still owe some amount to the business.
Bill Receivables is an accounting term for bills of exchange drawn on debtors or received by the way of endorsement from them. Whoever holds the bill receivables can demand the payment due for the bill at the due date specified on it form his debtors.
17. Trade Payables
Trade Payables is an amount payable on account of goods purchased or services taken in the normal business.
It includes both Sundry creditors and Bills Payables
Sundry creditors are those persons or firms from whom goods have been purchased or services are taken on credit and there payment is still due.
Bills Payable is an accounting term for bills of exchange accepted in favour of creditors. Whoever holds the bill payable is liable to pay the amount specified in the bill to the holder of bill receivable.
18. Entry
When a transaction or event is recorded in the books of accounts it is called as entry.
19. Bad Debts
Bad debts is an amount that has become irrecoverable from a creditor. It is a loss and is debited to profit & loss account as an expense and subtracted from the debtors in the balance sheet.
20. Insolvent
A person or an enterprise is declared insolvent when they are not in a position to pay its debts.