Basic accounting terminologies

Business Entity

The entity is anything that has a definite individual existence. A business entity is a recognized enterprise controlled by people or agencies. For example, Walmart, big Bazar, ITC Limited, etc.

 

Transaction

It’s a significant business event with a monetary impact on an entity's financial statement. It is recorded as an entry in its accounting records. For example, paying a supplier for services or goods delivered and paying a seller some cash, purchase of goods, receipt of money, incurring expenses, etc.

 

 Assets

An asset is a material and non-material source with an economic value.  For example, Machinery, plants, a fleet of trucks. These items will be shown on the asset side of the balance sheet. Different types of assets are 

1. Fixed Assets are the immovable assets used for the core operations to generate profits. A fixed asset is called so when it is at least 1 year old. Some of the assets are land, buildings, machinery, plant, furniture, and fixtures. 

2. Current Assets are assets held on a short-term basis(less than 1 year period) such as debtors (accounts receivable), bills receivable (notes receivable), stock (inventory), temporary marketable securities, cash, and bank balances.

3. Tangible Assets are physically present for example, car, furniture, building, etc.

4. Intangible Assets are those with no physical existence, but they cannot be ignored as they can impact the company`s worth. For example, goodwill, patents, trademark, etc.

5. Liquid Assets- A readily available and easily convertible asset. Liquid cash or equivalent is regarded as liquid assets.

6. Fictitious Assets- Fictitious assets are the expenses or losses which are not fully written off (not offset in the Profit and Loss A/c) during the particular accounting period. These expenses or losses are spread over more than one year.

 

Liabilities

Liability is an obligation or debt that an organization is liable to pay either in the near future or in the long-term. Since it is necessary to borrow money at some point in time to expand the business, purchase goods and services on credit, liability is mostly common in the majority of the firms. For example, for a real estate company, 10 tons of steel has been purchased on the Aril 1st( 6 months before)  at the rate of 50 rupees per kilogram, then the total credit needs to be entered in the credit Column is 5,00000 Rupees. 

 

Capital

It is the principal amount funded to begin the operations of a business firm. It is shown as capital on the liabilities side of the balance sheet.

 

 Sales

Sales are the total revenues collected by the firm while selling the goods or services to its customers. Sales may be cash sales or credit sales.

 

 Revenues

Revenue is the term used to express the sales figure but not the actual income. The business-related earnings by selling its products or services to customers are called sales revenue. Other items of revenue are used when the earning takes place due to commission, interest, dividends, royalties, rent received, etc.

 Expenses

These are costs incurred by a business in the process of earning revenue and achieve sales. The expenses can be depreciation, transportation, sales costs, rent, wages, salaries, telephone, etc.

 

Expenditure

Spending money on the business activities while hoping that it would give returns in the future is called expenditure. Various expenditures can be the building rent, salary, purchase of goods, purchase of machinery and purchase of furniture.

 

 Profit

It is usually calculated every quarter. Profits are the net difference between the expenses ( total cost of sales ) and the total amount of sales over a specified time period. It is usually calculated for the month, quarter, or year.

 

 Gain

A gain is a profit arising out of events or transactions which are incidental to the business. Some of the profits can come from other than the primary operations, for example, selling a fixed asset or a penalty being paid by the competitor for the claims.

 

 Loss

A loss is incurred when the cost of goods manufactured and sold is greater than the realized and unrealized revenues. A loss decreases the owner’s overall equity and recorded in monetary terms . e.g, cash or goods lost by theft or a fire accident, poor quarterly sales.

 

 Discount

A discount can be a cash discount or a trade discount. I  is the proportion or percentage of deduction announced by the seller against the actual per-unit price of a good, for example, selling a unit at 20 rupees instead of 30 rupees (original price). A deduction made on the amount of invoice allowed by the seller in return for immediate payment is cash discount.

 

  Voucher

It is the evidence (electronic or paper) in support of a transaction, for example, cash memos,   and invoices.

 Drawings

Withdrawal of funds by the owner from the business account for his/her personal use is known as drawings. Drawings lessens the investment of the owners.

 

 Purchases

Amount of goods procured by a business on credit or on cash for the purpose of use or sale. Purchase can be made to resale or manufacture the products.  For manufacturing, raw materials are purchased and processed further into finished goods before selling them. Purchases may be cash purchases or credit purchases.

 

Debtors

A person, country, or organization that owes money expecting a rate of interest from the borrower after a period of time.

 

 Creditors

The outstandings that need to be paid by someone or a firm.  The total amount standing to the favour of such persons and/or entities on the closing date are shown in the Balance Sheet as sundry creditors on the liabilities side.

 



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