ACCOUNTING TERMINOLOGY
It is necessary to understand some basic accounting terms which are daily in business world.
These terms are called accounting terminology.
1) 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 and creditor
relationship. Non-cash transaction is one where the question of receipt or payment of
cash does not at all arise, e.g. Depreciation, return of goods etc.,
2) 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.
3) Creditor
A person to whom money is owing by the firm is called creditor. For example, Madan is a
creditor of the firm when goods are purchased on credit from him.
4) 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 owners equity or net worth.
Owners equity means owners claim against the assets.
It will always be equal to assets less liabilities, say:
Capital = Assets Liabilities
5) 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.
6) 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.
7) 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.
8) 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 owners 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.
9) 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.
10) 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.
11)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. viz, 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.
12) 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, viz.,, 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.
13) 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.
14) 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.
15) 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,
16)
Account
It is a statement of the various dealings which occur between a customer and the firm. It can also
be expressed as a clear and concise record of the transaction relating to a person or a firm or a
property (or assets) or a liability or an expense or an income.
17) 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.
18) 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 isnecessary to audit the
accounts.
19 Proprietor
The person who makes the investment and bears all the risks connected with
the business is known as proprietor.
2.4.20 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.
2.4.21 Solvent
A person who has assets with realizable values which exceeds his liabilities is
insolvent.
2.4.22 Insolvent
A person whose liabilities are more than the realizable values of his assets is
called an insolvent.
