Accounting Terminology

1. CAPITAL:

It means the amount (in terms of money or assets having money value) which the proprietor has invested in the firm. For the firm, capital is liability towards the owner.

2. LIABILITY: Liability means the amount which the firm owes to outsiders, (except the proprietor). The claims of those who are not owners are called Liability. Liabilities = Assets Capital y Long term Liability: those liabilities which are payable after a long term, e.g., long term loans, debentures repayable after 5 years. y Current Liability: those liabilities which are payable in near future (generally within one year). E.g. creditors, bank overdraft, bill payable, shortterm loans, etc.

3. ASSET:

y Anything which enables a firm to get cash or

a benefit in future, is an asset.

y Assets are future economic benefits which

are owned or controlled by an organization or individual .

y E.g. Money owing by debtors, stock of

goods, cash, furniture, machines, buildings, etc.

Types of Assets: y Fixed Assets: those assets which are purchased for the purpose of operating the business but not for resale. E.g. : land, building, machinery, furniture, motor car etc.
y Current Assets: those assets of the business

which are kept for short term for converting into cash or for resale. E.g.: unsold goods, debtors, bills receivables, bank balance, etc.

4. REVENUE:

y The total amount of

money received by the company for goods sold or services provided during a certain time period. Revenue is different from the income. Income = Revenue - Expenses

5.

EXPENDITURE: y Expenditure is any amount paid for increase in assets of business. E.g. Raw material For business, Furniture for Business, etc .
y Incurring a liability or disbursement of cash for the purpose of obtaining assets, goods or services. y The benefits derived from incurring an expenditure are taken for a longer period of time.

Types of Expenditure:
y Capital Expenditure: incurred for obtaining a long

term advantage.
y Revenue Expenditure: incurred where benefits

expire within a year or which has been incurred merely to maintain the business or keep the assets in good working conditions.
y Deferred

Revenue Expenditure: incurred but carried forward on the presumption that it will be of benefit over subsequent periods.

6. EXPENSE: y It is the amount spent in order to produce and sell the goods and services which produces the revenue.
y The benefits derived from an expense are

consumed in the same period. E.g. payment of salaries, rent etc.

7. PURCHASES: y The term purchases is used only for the purchase of goods.
y Goods are those things which are purchased

for resale or for producing the finished products which also meant to be sold.
y Purchases include both cash and credit

purchases of goods.

8. SALES: y The term sales is used only for the sale of goods.
y Sales include both cash and credit (payment

is not received at the time of sale) sale of goods.

9. STOCK:

y The term stock includes goods lying unsold on a

particular date.
y The stock may be:
y Opening stock

means goods lying unsold in the beginning of the accounting year. y Closing stock - means goods lying unsold at the end of the accounting year.

10. DEBTORS: y A Person who owes money to the firm mostly on

account of credit sales of goods is called a debtor.

11. RECEIVABLES: y Receivables may be in the form of bills receivables or any other form except in the form of debtors. y The amount due to business entity from outsiders which are not included in debtors are covered under this head. y e.g. bills of exchange, amount receivables on account of subsidy etc.

12. CREDITORS:

y A person to whom money is owing by the firm is

called a creditor.
13. PAYABLES:

y Payables may be in the form of bills payable or any

other form except in the form of creditors. y The amount to be paid to outsiders by business entity except sundry creditors are covered under this head. y e.g. bills of exchange, expenses payable.

14. DRAWING: It is the amount of money or the value of goods which the proprietor takes for his domestic or personal use.

15. Discount:
An allowance or deduction allowed from an amount due is termed as Discount.
y Trade Discount: deduction allowed to the buyers

from the gross or catalogue price. y Quantity Discount: deduction allowed to the buyers from the gross or catalogue price on making bulk purchases. y Cash Discount: Discount allowed on prompt payment.

1. Cash System of Accounting 2. Mercantile / Accrual System of Accounting

Cash System of Accounting

y System in which accounting entries are made only

when cash is received or paid.

y No entry is made when a payment or receipts is merely

due.

Accrual System of Accounting

y A system in which accounting entries are made on the

basis of amounts having become due for payment or receipt.

y This system recognizes the fact that if a transaction

has occurred, its consequences cannot be avoided, and therefore, should be brought into the books in order to present a meaningful picture of profit earned or loss suffered and also of financial position of the firm concerned.