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Basic Accounting Terms:

• Event: A business event that impacts the ledger account balances. It means
happening of transactions which bring change in financial position of the
business. Examples of events are Gross Profit, Net Profit etc
• Transaction: It is an exchange of money, goods and services by a business. Some
examples of transactions are: Sale of goods, Purchase of goods, Receipts from
debtors, Payments to creditors, Purchase/Sale of fixed assets etc.
• Vouchers:
• Source Vouchers: an evidence of transaction having taken place. Example:
Cash memo, Bills, Receipts etc.
• Accounting Vouchers: these are prepared on the basis of source vouchers
showing accounts which are debited or credited.
• Trade Debtor: A person/ entity to which credit sale of goods or services is done.
They are also known as customers.
• Trade Creditor: A person/entity to which amount is owed against credit purchase
of goods and services. They are also known as suppliers.
• Purchase: It is purchase of goods to be sold in ordinary course of business. This
term is used to indicate commodities which business deals in, for example, if a
computer vendor purchases computer for manufacturer of computer, his
intention is to sale these computers, so he will write it as Purchase of goods in
business.
Purchase Return: It is return of goods which were purchased for resale.
• Sales: It is sale of goods in ordinary course of business.
Sales Return: it is return of goods sold.
• Assets: Economic resources of entity which give cash or benefits in future.
Fixed Assets: These assets are owned by businesses which are not for resale.
These are used for long term, normally more than one year.
• Tangible Fixed Assets: These assets have physical existence ie these can be
seen and touched. Examples of such assets are Land, Building, Plant,
Machinery, Computers etc.
 • Intangible Fixed Assets: These assets do not have physical existence ie these
cannot be seen or touched. Examples of such assets are Goodwill, Patents,
Computer softwares etc.
Current Assets: These are held by the business for resale and are converted into
cash in short term, normally in less than one year. Examples of current assets are
Unsold goods/ stock, Debtors, Short term investments etc.
Liquid Assets: Current Assets that can be realized ie can be converted into cash
in a shorter period are liquid assets. Examples of liquid assets are Cash and Bank
balances.
Wasting Assets: These assets have limited life and these decreases in value by
extraction. Examples of wasting assets are natural resources such as Coal and Oil
etc.
Fictitious Assets: These are expenses of huge amount the benefits of which are
deferred into numbers of years. For example if the huge Advertising expense of
Rs 3,00,000 is expected to benefit business of three years, then next two year’s
benefit ie Rs 2,00,000 will be dealt as Fictitious/ Nominal Asset.
• Liabilities: Claims of amounts against business entity.
Internal Liabilities: Liabilities towards Owners/ Proprietors. It is also known as
Capital of owner.
External Liabilities: These are the liabilities towards outsiders. Examples of
external liabilities are Creditors, Bank Overdraft, Bills Payable, Outstanding
Expenses etc. These are further classified into:
• Long-Term/Noncurrent Liabilities: These liabilities are payable after a period
of 12 months from the end of the financial year. Examples of long-term
liabilities are Long-term/ Bank and Institutional loans, Debentures, Public
deposits etc.
• Current Liabilities: These liabilities are payable within the period of 12 months
from the end of the financial year. Examples of current liabilities are Creditors,
Bank overdraft, Short term loan, Bills payable etc.
• Contingent Liabilities: These are not actual liabilities at present but on
happening of some event it may become a liability in future. Example a court
case pending against firm for compensation claimed by customer for damages,
the decision may go in favor of customer and firm will have to pay
compensation in future.
• Goods: Goods are those items which are purchased with the intention of selling
in future.
When these goods are purchased, they are written as Purchase Account.
 When these goods are sold, they are written as Sales Accounts in books.
• Stock/Inventory: Stock is represented by goods remaining unsold when these
were meant to be sold and goods remaining unused when these were meant to
be used in manufacturing process, at the end of the accounting period.
In case of trading concerns, stock means, goods remaining unsold at the end of
the accounting period, and it is termed as Stock In Trade.
In case of manufacturing concerns, stock means, goods remaining unsold at the
end of accounting period in the form of Raw Material, Work-in-Progress/Semi-
finished Goods and stock of Finished Goods.
• Profits: Profit means excess of Revenue over Expenses of business.
• Loss: Loss means excess of total Expenses over total Revenue of business.
• Expenses: These are amounts spent on purchase and sale of goods and/or
services. Examples of expenses are Purchase of goods, Salaries, Wages, Rent,
Interest etc.
• Revenues: These are the amounts received or receivable against sale of goods
and/or services. Examples of revenues are Sale of goods, Rent received, Interest
received, commission received etc.
• Drawings: Cash, goods or assets belonging to business, when taken by owner for
personal use, is termed as drawings.
• Capital: This is the claim of the owner over business. It is represented by
Cash/Bank balances and Properties that are introduced by owner into the
business. It is always equal to Assets less Liabilities of business.
• Cost: It is an expenditure incurred on a specific article, or product or activity.
• Gain: These are profits earned from transactions which are incidental to
business. These can be in the form of assets or investments sold at a price higher
than its book value.
• Expenditure: These are the amounts spent by business and it includes both
revenue and capital expenditure.
• Revenue Expenditure: This is the cost which is incurred as expense. For
example Purchase, Rent, Salaries etc. This does not increase the earning
capacity of business rather maintains it in the current year.
• Capital Expenditure: This is the amount spent in acquiring fixed assets. This
increases the earning capacity of the business and give benefits over the
number of accounting periods.
• Discount: This is reduction in amount of goods/services or reduction is amounts
due.
 • Trade Discount: This is reduction in price of goods by seller when goods are being
purchase in bulk quantity.
• Cash Discount: This is reduction in amounts due for making timely payment.
• Rebate: This is the discount allowed for reason other than for which trade
discount is allowed. This discount may be allowed because of poor quality of
goods.
• Account: This is a summarized record of similar transactions. For example Cash
Account is a summary of all cash transactions of business. This is also termed as
Ledger.
• Books of Account: These means system of records, which explains the financial
transactions of business.
• Entry: A transaction and event when recorded in the books of accounts is known
as entry.
• Debit: This term is derived from Italian word ‘Debito’ and written in books as ‘Dr’.
It represents the left side of an Account/Ledger. It represents mathematical sign
‘+’ or ‘-’ based upon the nature of that account.
• Credit: This term is derived from Italian word ‘Credito’ and written in books as
‘Cr’. It represents the right side of an Account/Ledger. It represents mathematical
sign ‘+’ or ‘-’ based upon the nature of that account.
• Depreciation: It is represented by the loss in value of asset due to continuous
use, technological obsolescence and wear and tear of asset.
• Bad debts: This represents the amount that has become irrecoverable from
customers due to their insolvency.
• Insolvent: A person or entity unable to pay his/its debts, may be due to
continuous losses to him/it.
• Investments: It is represented by assets purchased or amounts placed in bank in
order to earn incomes.
• Balance Sheet: This is the statement showing Assets, Liabilities and the Capital
of business.
• Entity: An entity means economic unit/business that performs economic
activities/business.

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