ACCOUNTING

Meaning of Accounting

Accounting, as an information system is the process of identifying, measuring and

communicating the economic information of an organization to its users who need
the information for decision making. It identifies transactions and events of a specific
entity. A transaction is an exchange in which each participant receives or sacrifices
value (e.g. purchase of raw material). An event (whether internal or external) is a
happening of consequence to an entity (e.g. use of raw material for production). An
entity means an economic unit that performs economic activities.

ACCOUNTING TERMINOLOGY

It is necessary to understand some basic accounting terms which are daily inbusiness world. These terms
are called accounting terminology.

Transaction
“An event the recognition of which gives rise to an entry in accounting records. It is an event which
results in change in the balance sheet equation. That is, which changes the value of assets and equity. In a
simple statement, transaction means the exchange of money or moneys worth from one account to
another account Events like purchase and sale of goods, receipt and payment of cash for services or on
personal accounts, loss or profit in dealings etc., are the transactions”. Cash transaction is one where cash
receipt or payment is involved in the exchange. Credit transaction, on the other hand, will not have ‘cash’
either received or paid, for something given or received respectively, but gives rise to debtor

Debtor
A person who owes money to the firm mostly on account of credit sales of goods is called a debtor. For
example, 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.

Creditor
A person to whom money is owing by the firm is called creditor. For example, Tola is a creditor of the
firm when goods are purchased on credit from him

Capital
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. It is also known as owner’s equity or net worth. Owner’s equity
means owner’s claim against the assets. It will always be equal to assets less liabilities, say:

Capital = Assets - Liabilities.

Liability
It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the words of
Finny and Miller, “Liabilities are debts; they are amounts owed to creditors; thus the claims of those who
ate not owners are called liabilities”. In simple terms, debts repayable to outsiders by the business are
known as liabilities.

Asset
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 benefits of a lasting nature.

Goods
It is a general term used for the articles in which the business deals; that is, only those articles which are
bought for resale for profit are known as Goods.

Revenue
It means the amount which, as a result of operations, is added to the capital. It is defined as the inflow of
assets which result in an increase in the owner’s equity. It includes all incomes like sales receipts, interest,
commission, brokerage etc., However, receipts of capital nature like additional capital, sale of assets etc.,
are not a part of revenue.

Expense
The terms ‘expense’ refers to the amount incurred in the process of earning revenue. If the benefit of an
expenditure is limited to one year, it is treated as an expense (also know is as revenue expenditure) such
as payment of salaries and rent. This watermark does not appear in the registered version -
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Expenditure
Expenditure takes place when an asset or service is acquired. The purchase of goods is expenditure,
where as cost of goods sold is an expense. Similarly, if an asset is acquired during the year, it is
expenditure, if it is consumed during the same year, it is also an expense of the year.

Purchases
Buying of goods by the trader for selling them to his customers is known as purchases. As the trade is
buying and selling of commodities purchase is the main function of a trade. Here, the trader gets
possession of the goods which are not for own use but for resale. Purchases can be of two types. cash
purchases and credit purchases. If cash is paid immediately for the purchase, it is cash purchases, If the
payment is postponed, it is credit purchases.

Sales
When the goods purchased are sold out, it is known as sales. Here, the possession and the ownership right
over the goods are transferred to the buyer. It is known as. 'Business Turnover’ or sales proceeds. It can
be of two types, cash sales and credit sales. If the sale is for immediate cash payment, it is cash sales. If
payment for sales is postponed, it is credit sales.

Stock
The goods purchased are for selling, if the goods are not sold out fully, a part of the total goods purchased
is kept with the trader unlit it is sold out, it is said to be a stock. If there is stock at the end of the
accounting year, it is said to be a closing stock. This closing stock at the yearend will be the opening
stock for the subsequent year.

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

Losses
Loss really means something against which the firm receives no benefit. It represents money given up
without any return. It may be noted that expense leads to revenue but losses do not. (e.g.) loss due to fire,
theft and damages payable to others,

Invoice
While making a sale, the seller prepares a statement giving the particulars such as the quantity, price per
unit, the total amount payable, any deductions made and shows the net amount payable by the buyer.
Such a statement is called an invoice.

Voucher
A voucher is a written document in support of a transaction. It is a proof that a particular transaction has
taken place for the value stated in the voucher. Voucher is necessary to audit the accounts.

Proprietor
The person who makes the investment and bears all the risks connected with the business is known as
proprietor.

Discount
When customers are allowed any type of deduction in the prices of goods by the businessman that is
called discount. When some discount is allowed in prices of goods on the basis of sales of the items, that
is termed as trade discount, but when debtors are allowed some discount in prices of the goods for quick
payment, that is termed as cash discount.

Solvent
A person who has assets with realizable values which exceeds his liabilities is solvent.
Insolvent
A person whose liabilities are more than the realizable values of his assets is called an insolvent.