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| Chapter-2 |
Basic Accounting Terms
Welcome to Ankitcommerce.com . Today in this article we gonna discuss about basic accounting terms for class 11th .please read this article till the end and also share with your friends
v Business Transactions Terms
It means a financial transaction or event entered into by two parties and is recorded in the books of account. It is an agreement between two parties involving the transfer or exchange of goods or services.
E.g. – sales of goods, purchases of goods, receipt from debtors, payment to creditors, purchase or sale of fixed assets, payment of interest, dividend, etc.
Account
It is a summarised record of transactions relating to a particular head at one place.
E.g. – purchase of goods, whether cash or credit, are shown in ‘Purchase Account’.
v Capital
It is the amount invested by the proprietor or partner in the business. It may be in form of money or assets having a monetary value. It is a liability of the business towards the proprietor or partner which increases with further investments made in the business and the amount of profit earned.
Capital is also known as the Owner’s Equity or Net Worth.
Capital
= Assets – Liabilities
v Drawings
It is the amount withdrawn or goods taken by the proprietor or partner for personal use. Goods so taken by the proprietor or partner are valued at purchase cost. Drawings reduce the investment (or Capital) of the Owners
.
v Liabilities
It means amount owed(payable) by the business. Liability towards the owners of the business is termed as ‘Internal Liability’. On the other hand, liability towards the outsiders, i.e., other than the owners(proprietor) is termed as ‘External Liability’.
(i) Non-Current Liability = It is that liability which is payable after a period of more than a year from the end of the accounting period.
E.g. – long-term loans, debentures, etc.
(ii) Current Liability = It is that liability which is payable within 12 months from the end of the accounting period.
E.g. – Bills payable, short-term loans, etc.
v Assets
They are the properties (tangible assets and intangible assets) owned by a business. They are the economic resources of the business.
E.g. – land, building, machinery, furniture, stock, debtors, cash and bank balances, trademarks, copyrights, goodwill, etc.
(i) Non-Current Assets = Those assets which are held by a business not with the purpose to resell but are held either as an investment or to facilitate business operations.
E.g. – Fixed Assets, Non-Current Investments, Long-term Loans, and Advances and other Non-Current Assets.
Fixed Assets = Those non-current assets of an enterprise which are held not to resell but with the purpose to increase its earning capacity.
(a) Tangible Assets: Those assets which have a physical existence, i.e., they can be seen and touched. E.g. – land, building, machinery, computer, furniture, etc.
(b) Intangible Assets: Those assets which do not have a physical existence, i.e., they cannot be seen and touched. E.g.- patents, goodwill, trademarks, Computer Software, etc.
(ii) Current Assets = Those assets which are held by the business with the purpose of converting them into cash within a short period, i.e., one year. E.g. – goods are purchased with a purpose to resell and earn a profit, debtors exist to convert them into cash, i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
(iii) Fictitious Assets = Those assets which are neither tangible assets nor intangible assets. They are losses not written off in the year in which they are incurred but in more than one accounting period. E.g. – Deferred Revenue Expenditure, Discount on Issue of Debentures.
v Receipts
It is the amount received or receivable for selling assets goods or services.
(i) Revenue Receipts = It is the amount received or receivable in the the normal course of business say against sale of goods or rendering of services or investment of business resources say in fixed deposit. E.g. - amount received or receivable against the sale of goods or rendering of services, interest on fixed deposits or investments, etc.
(ii) Capital Receipts = It is the amount received or receivable against transactions that are not revenue in nature. E.g. amount received or receivable for the sale of machinery, building, furniture, investment, loan, etc.
v Expenditure
It is the amount spent or liability incurred for acquiring assets, goods or services.
(i) Capital Expenditure = It is an expenditure incurred to acquire assets or improving the existing assets which will increase the earning capacity of the business, i.e., will give the benefit of enduring nature to the business. E.g. - purchase of machinery to manufacture goods, purchase of furniture, or computers to carry on business.
(ii) Revenue Expenditure = It is the expenditure incurred, the benefit of which is consumed or exhausted within the accounting period. It has a direct relationship with revenue or with the accounting period, e.g. the cost of goods sold, salaries, rent, electricity, expenses, etc.
(iii) Deferred Revenue Expenditure = It is a revenue expenditure in nature but is written off (charged) in more than one accounting period. E.g. - large advertising expenditure that will give benefit more than one accounting period.
v Revenue
It means the amount which, as a result of operations, i.e., sale of goods or services rendered, is added to the capital. E.g. - ships from sale of goods, rent, commission, etc.
Income = Revenue – Expense
v Expense
It is the cost incurred for generating revenue.
(i) Prepaid Expense = It is an expense that has been paid in advance and the benefit of which will be available in the following year or years.
(ii) Outstanding Expense = It is an expense that has been incurred but has not been paid.
v Income
It is the profit earned during a period.
Income = Revenue – Expense
(Income is also known as profit)
v Profit
It means income earned by the business from its operating activities the activities carried out by the enterprise to earn the profit. Profit is further divided into gross profit and net profit.
(i) Gross Profit = It is the difference between revenue from sales and or services rendered over its direct cost.
(ii) Net Profit = It is the profit earned after allowing for all expenses in case expenses are more than the revenue it is a net loss.
v Gain
It is a profit of irregular or non-recurrent nature. It is a profit that arises from transactions which are the operating activities of the business but are incidental to it such as gain on sale of fixed assets or investments.
v Loss
It is an excess of expenses of a period over its revenues. It decreases the owner’s equity.
v Purchases
The term ‘purchase’ is used for purchases of goods for resale or for producing the finished products that are also to be sold.
v Purchases Return/Return Outward
Goods purchased may be returned to the seller for any reason, say,they are defective.
v Sales
The term ‘sales’ is associated with or used for sale of goods that are dealt with the firm.
v Sales Return/Return Inward
Goods sold when returned by the purchaser.
v Revenue from Operations
It means revenue earned by an enterprise (firm or company) from its operating activities. The term is prescribed in schedule III of the companies act, 2013, a format in which balance sheet and statement of profit and loss (profit and loss account) is prepared.
v Goods
Goods are the physical items of trade. It is a term that applies to all the items making up the sales or purchase of a business.
v Stock/Inventory
Stock (inventory) is a tangible asset held by an enterprise for the purpose of sale in the ordinary the course of business or for the purpose of using it in the production of goods meant for sale.
(i) Stock or Inventory of Goods = Stock goods or inventory in the case of trading, concern comprises stock (inventory) of goods remaining unsold.
(ii) Stock or Inventory of Raw Material = It comprises the stock of raw material used for the manufacturing of goods lying unused.
(iii) Work-in-Progress = It is a stock that is in the process of being finished, i.e., they are partly finished goods.
v Trade Receivables
It is the amount receivable for the sale of goods or services rendered in the ordinary course of business.
(i) Debtor = Debtor is a person who owes an amount to the enterprise against credit sales of goods or services in its ordinary course of business.
(ii) Bill Receivable = It means a bill of exchange accepted by a debtor, the amount of which will be received on the specified date.
v Trade Payables
It is the amount payable for the purchase of goods or services are taken in the ordinary course of business.
(i) Creditor = It is a person to whom and enterprise shows the amount against the credit purchase of goods or services are taken.
(ii) Bills Payable = It means a bill of exchange accepted, the amount of which will be payable on the specified date.
v Cost
It is the amount of expenditure incurred on or attributable to a specified article product or activity.
v Voucher
It is evidence of a business transaction. E.g. - cash memo, invoice or bill, receipt, debit/credit notes, etc.
v Discount
when customers are allowed rebate in the prices of goods by the business or from the amount paid by customers, it is known as a discount.
(i) Trade Discount = It is the rebate allowed by the seller on the basis of sales, either quantity or value.
(ii) Cash Discount = It is the rebate allowed for timely payment of the due amount. It is an expense for the party allowing the discount and income for the party receiving a cash discount.
v Books of Account
Books of account are those books in which transactions are recorded, and include cash book, bank book, journal proper, and ledger.
v Entry
A transaction and event when recorded in the books of account.
v Proprietor
The person who makes the investment and bears all the risks associated with the business is called proprietor.
v Depreciation
It is a fall in the value of acid because of uses or with efflux of time or obsolescence or accident.
v Cost of Goods Sold
It is the direction the cost attributable to the production of goods sold or services rendered.
v Bad Debts
It is the amount owed to the business that is written off because it has become irrecoverable. It is a loss for the business.
v Insolvent
It is a person or an enterprise that is not in a position to pay its debts.
v Solvent
It is a person or an enterprise that is in a position to pay its debts.
v Book Value
It is the amount at which an item appears in the books of account or financial statements.
v Balance Sheet
It is a statement of the financial position of an individual or enterprise at a given date, which exhibits its assets, liabilities, capital, reserves and other account balances at their respective book values.
v Entity
An entity means and the economic unit which performs economic activities.
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