Basic terminologies of accounting

 

Basic terminologies of accounting:

1. Capital: Capital is the sum of money or money’s worth invested in the firm by the owner. Capital may be in the form of money, cash, goods, etc. Capital is also called owner's equity. It is the difference between the total assets and the total liabilities of the firm. In other words, it is the excess of total assets over the total liabilities of the firm. Capital in the liability of the firm towards the owner.

2. Liabilities: Liability in the sum of money payable to outsiders. When goods or anything is purchased on credit from a supplier or when loans are taken from bank or any financial institution or any other persons or parties, liabilities are created. It is also called an outsider's claim. Liabilities are of two types:

(a) Short-term liabilities: Short-term liabilities are those liabilities that are payable within a short period of time especially within one accounting period. It is also called current liability. Trade creditors, expenses creditors, bills payable, outstanding expenses, bank overdraft, etc.

b) long-term liabilities: Long-term liabilities are those liabilities that can be repaid within many years. In other words, such liabilities can be repaid after a year or after one accounting year. Debentures, bank loans, bonds, long term loans are examples of long-term liabilities. Long-term liabilities are also called fixed-term liabilities.

3. Assets: Anything of use to future operation of the firm and belonging to the firm is called assets. In other words, all types of properties belonging to the firm are called assets. Land and building, plant and machinery, goodwill, vehicles, investment, prepaid expenses, etc are some examples of assets.

Assets can be classified as follows:

a) Fixed assets: The assets which are purchased by the business organization for long-term use are called fixed assets. Fixed assets give the benefit for more than one accounting year.

 (i) Tangible fixed assets: The assets which exists physically and which can be        seen are called tangible fixed assets. P/M , F/F, Building equipment, vehicles, all are tangible fixed assets.

(ii) Intangible fixed assets: The assets which do not exist physically and can not be seen physically are called intangible fixed assets. Goodwill, patent, trademark, copyright, etc, are examples of intangible fixed assets.

(b) Current assets : Current assets means the assets of the business organization which can be easily converted into cash within a year. Examples of current assets are closing stock, debtors, bills receivable, prepaid expenses, etc.

(4) Purchases: Purchase means acquiring or buying raw materials for production purpose or resale purposes either on cash or credit. The manufacturing company purchases raw materials for production purposes whereas the trading company purchase finished goods for resale purposes. Here both purchases of raw materials and purchase of finished goods are called purchases.

(5) Sales: The exchange of goods or services with money is known as sales. In an organization, sales may be of two types. One is the sale of goods and the second is the sale of assets. The exchange of goods with money is called the sale of goods and the exchange of assets with money is called the sale of assets.

(6) Goods: Goods refer to all merchandise commodities which are purchased by the business for selling.

(7) Debtors: The persons or parties to whom the business organization sells goods or services on credit are known as debtors. In other words, Debtors happen when goods are sold on credit.

(8) Creditors: the persons or parties from whom the business firm purchases the goods or services on credit are known as creditors. Creditors happen when goods or materials are purchased by the business on credit.

(9) Inventories: the goods which remain unsold in the business firm at a particular date is known as inventories.

(10) Revenue : It is the monetary value of the products or goods or services sold to the customers during a certain period. Revenue results from sales, from rendering services and from sources like interest received, commission received.

(11)Expenses: Expenditure incurred by the firm to earn revenue is termed as expenses. It is the cost incurred to produce goods or services.

(12) Drawings: Money or value of goods belonging to business used by the proprietor or owner for his personal use.

(13) Proprietor or owner: The person who invests his money or money's worth and bears the risk of the business.

(14) Transaction: Any exchange or dealing of goods or services for cash or on credit by the business with any other parties or business.

(15) Entry: The record of a transaction in the books of accounts is known as entry.

(16) Bad debts : Bad debts are irrecoverable debts from customers during the course of the financial year.It happens when good are sold on credit to customers.

(17) Profit: The excess of income over expenditure is known as profit.

18) Loss : The excess of expenditure over income is known as loss.

19) Debit : Debit refers the left hand side in accounting. Thus to debit means to record the transaction in left hand side of an account.

(20) Credit : Credit refers the right hand side in accounting. Thus to credit means to record the transaction in right hand side of an account.