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Accounting Terminologies
In order to have better understanding of accounting, it is necessary to
know the meanings of certain basic terms used in accounting. Accounting is a
versatile system which serves a large number of purposes in the modern business
world. Hence, the following terminologies need to be understood.
👆 Financial Accounting
👆 Types of Accounting
👆 Cost Accounting
👆 Types of Cost Accounting
👆 Methods and Techniques of Costing
👆 Cost Sheet
👆 Cost Management
👆 Cost Control and Reduction
👆 Cost Accounting System
👆 Difference between Cost Accounting and Financial Accounting
👆 Management Accounting
👆 Materials Control
👆 Bookkeeping
👆 Accounting methods
Transactions
Exchange of goods and services between two persons or parties for money
or money's worth is known as Transactions.
Monetary Transactions
The transaction which involves an exchange of money or money’s worth
directly or indirectly is called monetary transactions. Only monetary
transactions are recorded in the books of accounts.
Cash Transactions: A business transaction in which cash is
paid or received immediately is known as cash transaction.
e.g i) Purchase of goods for cash at ` 15,000/-
ii) Payment of salary at ` 5,000/-
Credit Transactions: A credit transaction is one in which cash is
not paid or received immediately at the time of a transaction but it is paid or
received at a later date.
e.g i) Goods sold on credit to Mr. Aman at ` 8,000/-
ii) Sold machinery to Mr. Amar Singh on credit at ` 20,000/-
Non-Monetary Transactions
The transaction which does not involve an exchange of money or money’s
worth directly or indirectly are called Non-monetary transactions. An exchange
of one thing against another thing is called as Barter transactions.
Entry: Recording of a business transaction in the proper form or method in the books
of accounts is called an entry.
Narration: A brief explanation of the business
transaction for which an entry is passed is called as a narration. It is always
given in a bracket below the journal entry and it usually starts with the word
"Being" or "For".
Goods: The term ‘goods’ refers to merchandise, commodities, articles or things
in which a trader trades. These are purchased or manufactured for the purpose
of sale and to earn profit.
e.g i) Medicines are goods for the chemist.
ii) Vegetables are goods for the vegetable vendor.
iii) Parts like tyres, engine gearbox, cables are produced by a vehicle
manufacturer like Bajaj Auto, Hero Motors.
Capital: The total amount invested into the business
by the owner is called capital. Excess of assets over the liabilities is also
called as capital. The equation for this is:
Capital = Assets – Liabilities
Capital is a liability of the business as this amount is payable by the
business enterprise to the owner at the time of closure of the business.
Drawings: The amount of cash or value of goods, assets,
etc., withdrawn from the business by the owner for personal use called as
drawings.
E.g.: A proprietor pays colleges fees of his son, or pays for his
medical expenses, mobile bills etc, from the business.
Debtor: A person who has to pay to the business for
getting goods and services on credit is known as debtor. A debtor is a person
who owes money to the business.
Creditor: A person to whom business has to pay for
getting goods or services on credit is known as creditor. A creditor is a
person to whom business owes money.
Bad Debts: An irrecoverable amount from a debtor is
known as "Bad Debts". It is a revenue loss to the business.
Expenditure: An amount spent by the business for any
consideration received by business is called expenditure.
Capital Expenditure: This expenditure is incurred to acquire fixed
asset or to increase the value of fixed asset. It gives the benefit for a long
period of time and it is non-recurring in nature.
E.g. : Purchase of Machinery, extension of building, purchase of
computer etc.
Revenue Expenditure: Revenue expenditure is expenditure from which
no future benefit is expected but having immediate or short term benefit may be
less than one year. It does not increase profit earning capacity of an
organization. These are normal day to day operating expenses of a business
organization and appear on the debit side of Trading A/c or Profit and Loss
A/c.
E.g. : Rent paid, Salary paid, Wages paid etc.
Deferred Revenue Expenditure: An expenditure which is basically revenue in nature but benefit of which
is not exhausted within one year is called as Deferred Revenue Expenditure.
Such expenditure is written off over number of years. Such written off
amount is shown on debit side of profit and loss a/c and unwritten amount is
shown on asset side of the Balance Sheet.
E.g. : Heavy expenditure on advertising , heavy
legal expenses.
Trade
Discount: It is an allowance given on catalogue price
or list price of goods. This discount is allowed at the time of purchase/sale
of goods. Value of goods purchased/sold recorded is net value payable i.e after
deduction of amount of trade discount allowed. If goods of ` 1000/- are sold at
5% trade discount, the value of goods that will be recorded will be ` 950/-
both by the purchaser and the seller and not ` 1000/-. Hence, trade discount
does not appear in the books of accounts separately.
Related Articles
👆 Financial Accounting
👆 Types of Accounting
👆 Cost Accounting
👆 Types of Cost Accounting
👆 Methods and Techniques of Costing
👆 Cost Sheet
👆 Cost Management
👆 Cost Control and Reduction
👆 Cost Accounting System
👆 Difference between Cost Accounting and Financial Accounting
👆 Management Accounting
👆 Materials Control
👆 Bookkeeping
👆 Accounting methods
Cash Discount: It is the amount deducted from the final
amount due at the time of receipt. It is the concession given for encouraging
prompt payment. It is given either for the spot payment or for payment within a
specific period. Cash discount is calculated after deducting trade discount, since
it is loss to the seller and gain to the buyer, cash discount appears in the
books of accounts.
Goodwill: Goodwill may be described as the aggregate of those intangible
attributes of a business which contributes to its superior earning capacity
over a normal return on investment. It may arise from such attributes as
favourable locations, the ability and skill of its employees and management,
quality of its products and services, customer satisfaction etc.
Goodwill is the reputation of business expressed in terms of money.
Goodwill is an intangible asset.
Profit or Loss
Profit: When the
selling price of goods is more than the cost price it is a profit. Profit
increases the capital of the business.
e.g. If goods are sold for ` 50,000/- and all expenses during the period
amounted to 30,000/- then the profit is ` 20,000/-
Loss: When cost
price of goods is more than its selling price it is a loss. Loss decreases the capital
of business.
e.g If goods are sold for ` 50,000/- and all expenses during the period
amounted to 60,000/, then the loss will be ` 10,000/-
Income: It is
revenue arising as a result of business transactions. It is the amount
receivable or realised from services provided and earnings from interest,
dividend, commission, etc.
Revenue: It is income that a business has from its normal business activities usually from the sale of goods and services to customer.
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