ACCOUNTING TERMINOLOGY
Compiled by- Dr, Bhupendra Jain,
9811255704
Ph.D., LLB, MBA, PGDBM, M. Com
1. Proprietor (owner/entrepreneur): -A person who makes all the investments and bears all the risks connected
with the business is called the Proprietor.
2. Capital: It means amount (in terms of money or assets having money value) which the proprietor has invested in
the business or can claim from the business.
For the business it is a liability towards the owner because owner is treated to be different from the
business.
Capital is also known as owner’s equity or net worth.
Owner’s equity means the owner’s claim against the assets of the business and it will always be equal to
“assets - liabilities”.
Capital = Assets - Liabilities
3. Drawings -It is an amount of money or value of goods, which the proprietor withdraws for his domestic or
personal use. Drawings reduce the capital of the owner
Example: Owner withdrew cash ₹ 6,000 and goods worth ₹ 200 from business for personal use ,then drawings
are ₹.6,200.
4. Goods: - Goods are things which are purchased for resale or for producing finished products, which are also
meant to be sold. It relates the goods in which the business is dealing.
Example: For a furniture dealer, wood, nails, etc. are called goods.
For a property dealer, land, shop, etc. are called goods.
For a stationery merchant, stationery is goods
5. Accounting period: This life of a business is divided into a number of small periods which is known as
accounting period which can be a Financial Year, a Calendar Year or any period of 12 months.
Financial Year: 1st April to 31st March
Calendar Year: 1st Jan to 31st Dec.
6. Stock (Inventory): -The term Stock includes goods lying unsold on a particular day.
Opening Stock: It means goods lying unsold in the beginning of the accounting year.
Closing Stock: It means goods lying unsold in the end of the accounting year.
Stock is of three types:
a) Stock of raw material
b) Stock of WIP (work in progress)/Semi-finished goods
c) Stock of finished goods
NOTE: Stock is valued at cost or market price whichever is less.
7. Debtors: -The person who owes money to the firm mostly on the account of credit sales of goods is called a
Debtor. Example: If a business sells goods to Sohan on credit, then Sohan will be called a Debtor.
8. Creditor: -A person to whom the firm owes money on account of goods purchased on credit is called a Creditor.
Example: If business purchases goods on credit from Mohan, then Mohan is a Creditor.
9. Purchases: -The term purchase is used for purchase of goods only.
Example: Furniture purchased by a property dealer is not treated as purchases but if it is purchased by a furniture
dealer, it is treated as purchases.
Purchases are of two types:
a) Cash Purchases: goods purchased for cash
b) Credit Purchases: goods purchased on credit
10. Purchase returns (Return outwards): -When purchased goods are returned to the suppliers, it is called
Purchase Returns. The reason for purchase return can be:
a) Defect in goods
b) Goods not up to specifications
c) Late delivery of goods etc
11. Sales: -The term Sales is only used for sale of goods.
Example: If a furniture dealer is selling furniture, it is called sales. But if he is selling his shop or machinery, it is
not treated as Sales.
Sales is of two types:
a) Cash Sales: - goods sold for cash.
b) Credit Sales: - goods sold for credit
12. Return Inward (Sales Returns): -Some customers might return the goods sold to them. These are termed as
Sales Returns.
13. Business transactions: -An economic activity that affects financial position of the business and can be
measured in terms of money e.g., sale of goods, paying for expenses etc. It is an event which involves
exchange of goods or services between two or more parties. It can be a cash transaction or a credit transaction.
14. Assets: -Valuable things owned by business which enables the firm to get cash or a benefit in the future, it is
termed as Assets. Example: Machinery, stock, furniture, debtors, cash, B/R (bills Receivable) etc.
Assets are classified as:
Non- current assets Current Assets Fictitious Assets
or Fixed Assets
These assets acquired or purchased for facilitating They are assets that are Assets which do not
business operations and not for resale. kept for a short term have any physical form
They are further classified in to : (generally 1 year) for or a real value, they are
Tangible Assets Intangible Assets converting into cash or not real assets on legal
Those assets which have They do not have any resale. Their value and technical grounds.
physical existence i.e., physical existence. You changes constantly. Example:
cannot see them or touch Deferred Revenue
they can be seen or Example: Cash Balance,
them, but you can feel expenditure, Preliminary
touched Bank Balance, Stock,
their effect. They are Expenses, Heavy
Debtors, B/R, Pre-paid
assets that are not Advertising Expenditure,
Example: Expenses (Expenses paid
normally purchased or discount or loss on issue
in advance), Accrued
sold in open market. They of shares or Debentures
L & B (Land and income (Income due but
may be purchased and
Building) not received) etc.
sold in ‘special
P & M (Plant and
circumstances.
Machinery)
Furniture and fitting Example: Goodwill,
etc Patents, Copyright, Trade
mark, Computer software
Explanation of Example of Fictitious Assets: -
The company spent ₹ 20 crores as preliminary expenses at the time of formation of company. If the entire
expenditure is taken as expense, it will adversely affect the profit position; therefore, this expenditure should
be spent over certain yea₹ It is not in interest of business to show these fictitious assets in account that is why,
fictitious assets are written off as early as possible.
15. Revenue: - It in accounting means anything which comes into the business. It consists of the amount received
from the sale of goods; it also includes the receipt of rent, commission, interest, dividend etc.
Revenue is related to the day-to-day affairs of business and it should be of a regular nature. It would not
include capital introduced by the owner or the loan taken.
16. Expenses: - It is a cost incurred in producing and selling goods and services.
OR
It is a cost of use of things or services for the purpose of generating revenue. Example: Rent Paid,
Commission Paid, Taxes Paid, bad debt, depreciation etc.
17. Income: - It is the excess of revenue over expenses
Income = Revenue — Expenses
Example: Goods costing ₹ 4 lakhs are sold for 5 lakhs, the 5 lakhs is Revenue, 4 lakhs is Expense and
therefore Income = ₹ 1 lakh (5 lakhs - 4 lakhs)
18. Gain: Usually this term is used for profit of an irregular or non-recurring nature. Example: Appreciation in the
value of an asset, profit on sale of fixed assets etc.
18. Losses: - It is the excess of expenses over revenue. It also refers to unwanted burden which the business is
forced to bear. Example: Loss of goods due to theft, fire or accidents. Losses due to strikes, lockouts, natural
calamities, Loss on sale of fixed assets etc.
19. Liabilities: - It means the amount which the firm owes to outsiders except proprietor
OR
It is the claim of those who are not owner
Liabilities can be classified into the following: -
Non – current Liability or Current Liability or Contingent Liabilities:
Long Term Liabilities Short Term Liabilities
These are those liabilities which are These are those liabilities which are These are not real liabilities. Future
payable after a long term (generally payable in the near future (generally events can only decide whether it is
more than 1 year) within 1 year) a real liability or not. Due to their
Example: Example: uncertainty, they are termed as
Loans Creditors, Contingent Liabilities.
Debentures. Bank Overdraft (B/O), Example:
Bill Payable (B/P), 1. Value of bill discounted
Outstanding Expenses (O/S 2. Cases pending in the court of law
expenses) 3. Guarantee undertaken etc.
Income received in advance (pre- NOTE: The value of Contingent
received income) Liability is not shown in the balance
sheet but it is mentioned as a
footnote outside the balance sheet
20. Voucher: - It 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. It may be in the form of cash receipt, invoice, cash memo, bank pay-in-slip
etc. Voucher is necessary to audit the accounts.
21. Depreciation: - Depreciation is the fall or decrease in the value of fixed assets due to continuous use or wear and
tear or accidents or obsolescence or because of fall in its market price.
22. Bad debt: - the amount which is irrecoverable from debtor and is written off is called as bad debt.
23. Discount: - When customer is allowed reduction in the prices of goods by business, it is called discount.
It can be classified as
Trade discount Cash discount
The purpose of this discount is to persuade the buyer The objective of providing cash discount is to
to buy more goods. It is Offered at an agreed encourage the debtors to pay the dues promptly.
percentage of list price at the time of selling goods. This discount is recorded in the account books.
This discount is not recorded in the account books as it
is deducted in the invoice/cash memo.
