VIDYA BHARTI EDUCATIONAL INSTITUTIONS

ACCOUNTING TERMINOLOGIES

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Some useful Accounting TerminologyCapital

It means the amount (in terms of money or assets having money value) which the proprietor has invested in the firm or can claim from the firm. For the firm Capital is a liability towards the owner. It is so because the owner is treated to be separate from the business.

LiabilitiesIf an amount is due to be paid to any other person or institution other than the owner it is called as a liability.

Liabilities can be classified into following:i) Long-term liabilities: These are those liabilities which

are payable after a long term, (generally more than one year).

Example; Long-term loans, debentures etc.ii) Current liabilities: These are those liabilities which

are payable in near future ,(generally within one year).

Example; creditors, bank overdrafts, bills payable, short-term loans, etc.

Assets Any physical thing or right owned that has a money value is an asset. In other words, an asset is that expenditure which results in acquiring of some property or benefit of a lasting nature.

Assets can be classified as:i) Fixed Assets: Fixed assets are those assets which

are purchased for the purpose of operating the business and not for resale. E.g. land, building, machinery, furniture, etc.

ii) Current Asset: Current assets are those assets of the business which are kept for short term for converting into cash. E.g. debtors, bills receivables, bank balance, etc.

Debtors

A person who owes money to the firm, generally on account of credit sale of goods is called a debtor.

For e.g. When goods are sold to a person on credit that person pays the price in future. He is called a debtor because he owes the amount to the firm.

Receivables The term receivables is used for the

amount that is receivable by the firm, other than the amount due from the debtors.

CreditorsA person to whom the firm owes

money is called a creditor. For e.g. Mr. M is creditor of the firm when goods are purchased on credit from him.

Payables The term payables is used for the amount payable by the firm, other than the amount due to creditors.

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

Revenue It means the amount which, as a result of operations, is added to the capital. “Revenue is an inflow of assets which results in an increase in owner’s equity. E.g. sale of goods, rent income.

Expense It is the amount spent in order to

produce and sell the goods and services which produce the revenue. “Expenses is the cost of the use of things or services for the purpose of generating revenue”. E.g. payment of salary, wages, rent, etc.

Income It is the profit earned during a period of

time. In other words, the difference between revenue and expense is called income.

Gross Profit Gross profit is the difference

between sales revenue or the proceeds of goods sold and services rendered over its direct cost.

Net ProfitNet Profit is the profit made after

allowing for all expenses. In case, expenses are more than revenue, it is Net Loss.

Cost of goods sold It is the direct cost of the

goods or services sold.

Expenditure Expenditure is the amount spent or liability incurred for the value received. Expenditure may be classified into:

i) Revenue Expenditure: It is the amount that is incurred in current activities to purchase goods and services which are consumed during the period.

ii) Capital Expenditure: It is the amount that is incurred in purchasing assets which will give benefit extending over a number of accounting periods.

Discount When customers are allowed any type

of reduction in the prices of goods by the businessman, that is called discount.

GainIt is a term used to describe profit of an

irregular nature, e.g. capital gains.

Cash Transaction Transactions involving

immediate receipt or payment of cash.

Credit Transaction Transactions in which the

receipt/payment of cash is postponed to a future date is called as a credit transaction.

Net worthIt means assets minus outside liabilities.Profits of a business increase net worth where as losses reduce the net worth of a business.

Turn overIt means total trading income from cash sales and credit sales.

Voucher Any written document in support of a business transaction is called a voucher. It is an objective evidence in support of a transaction.

Business TransactionsAny event which involves

exchange of money or money’s worth between the firm and any other person is known as a Business Transaction.

In other words any event which affects the business and involves money is a Business Transaction.

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