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ACCOUNTING TERMS
Meaning of accounting:-
The discipline which analyses the art & principles of recording monetary transactions.
ACCOUNTING TERMS
A number of basic terms are used in accounting , so it is necessary to know the meanings of
these basic accounting terms are as follows:
1. Transaction :-
Any exchange of goods & services, for cash or non credit by the business with any
other business transaction is an economic activity of the business that change its financial
business.
2. Entity :-
Entity means something or someone having a separate existence. In other words, Entity
means a thing or a person having a definite separate existence.
3. Proprietor or owner:-
Proprietor is the person who invests money or money’s worth into the business as
capital & bears all the risks of the business.
4. Equity:-
Equity means the claims against the assets of an enterprise or rights in the assets of an
enterprise. There are two types of equity:
a)Owner’s equity :-
Owner’s equity means the claims of the owner against the assets of the enterprise
Owner’s equity refers to owner’s capital.
b)Outsider’s equity:-
Outsider’s equity refers to liabilities of an enterprise.
5. Capital:-
Capital is total assets minus total liabilities. For e.g. The total assets of business are
Rs 60000 & total liabilities of the business are Rs 20000 the excess of the total assets over the
total liabilities of the business viz. ( 60000-20000 )=Rs 40000 will be the owner’s capital.
8. Assets:-
Assets are future economic benefits, the rights which are owned or controlled by an
organization or individuals .Assets include:
a) Physical or real properties or things called tangible assets like lands, buildings. P &M etc,
owned by a business.
b) Rights in certain things or certain rights having money value called intangible assets, such as
goods will patent right, trade marks & copy rights possessed by a business.
C) Debts or amounts due to a business from others, such as sundry debtors, bill receivable &
accrued incomes etc.
9. Liabilities:-
Liabilities means claims of outsiders against a business concern which blind the
business concern to others.
10. Debtors:-
A debtor is a person who owes money to the business. He owes money to the business
because he has received some benefit from the business. A constitutes an asset for the business.
A debtor may be a trade debtor, a loan debtor, a debtor for an asset sold on credit, a debtor for
the service rendered on credit.
11. Debt:-
The amount of a business transaction due from a person to the person is called debt.
16. Creditor:-
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A creditor is a person to whom the business owes money to him, because he has given
some benefit to the business. A creditor constitutes a liability for the business. A creditor may
be a trade creditors, a loan creditor, creditor for an asset purchased on credit, an expenses
creditor.
17. Solvent:-
A businessman is said to be solvent when he is able to pay his liabilities in full.
18. Insolvent:-
A business is said to be insolvent when he is not able to pay his liabilities in full.
19. Goods:-
Goods refer to merchandise, commodities, products, articles or things in which a trade
deals.For e.g. for a stationery merchant, pens, pencils, etc
20. Purchases:-
Goods purchased by a business are called purchases. The purchases of goods may be
cash purchases or credit purchases. The purchases of goods are recorded in purchases account.
21. Sales:-
Goods sold by the business are called sales. The sales of goods may be cash sales or
credit sales. The sales of goods are recorded in sales account.
25. Expenses:-
Expenses are the costs incurred in connection with the earning of revenue.
26. Loss:-
28. Gain:-
Gain refers to revenue which is not generated through routine or regular business
activities.
29. Profit:-
Profit is the excess of revenue over the expenses of a given period of time, usually a
year. Profit is also termed as net profit.
30. Debit:-
Debit means the amount owed by or due from an account or charged an account for the
benefit received by that account.
31. Credit:-
Credit means the amount owed to an account for the benefit given by that account in
belief that its value will be returned at a later date.
32. Account :-
An account is the summary of transaction affecting one person, one kind of property or
one class of gains or losses.
33. Folio:-
Folio means the page of a journal or the page of a ledger.
34. Entry:-
The record of a transaction in a book of accounts is known as an entry.
35. Folioing or paging:-
Entering the folio number of the journal or any subsidiary in the ledger & the folio
number of ledger in the journal or any subsidiary book is called folioing.
36. Carried down, Brought down :-
Carried down is written in a ledger account, at the time of balancing it, at the end of an
accounting period, to indicate the balance in that account has been carried down to the next
period.& Brought down is written on a ledger account, at beginning of the next accounting
period, to indicate that the opening balance in that account has been brought down from the
previous accounting period.
Conventions
i) Relevance:-
The convention of relevance stresses the need of relevant informations should be made
available which are relevant and useful for achieving its objectives.For e.g. the business is
interested in knowing as to what has been total labour cost? It is not interested in knowing
this aspect that how many are employed, how much employees spend and what they save.
ii) Objectivity:-
The convention of objectivity states that all accounting must be based on objecting
evidence.it means that the transactions recorded in the books should be supported by verifiable
documents. It also emphasis that accounting information should be measured & expressed by
the standards which are commonly acceptable.for e.g. the unsold stock at the end should be
valued at cost price & not a higher although it is likely to be sold at higher price in future.
iii) Feasibility:-
The convention of feasibility emphasis that the time, labour & cost of analyzing,
information should be compared vis-à-vis benefit arising out of it. For e.g. the cost of ‘oiling &
greasing ‘the machinery is so small that its break up per unit produced will be meaningless &
will amount to wastage of labour & time of the accounting staff.
CONCEPTS
i)Materiality concept:-
Materiality needs that accounting should should focus on material facts & should not be
wasted in recording & analyzing immaterial & insignificant facts. it places a restriction on
what should be recorded and reported. For e.g. the fall in the value of stocks, loss of
markets due to competition or government regulation, increase in wage bill under recently
concluded agreement, published accounts of business entities round off all figures to
nearest rupees etc.
The essence of material concept is :the omission or misstatement of an item is material if in
the light of surrounding circumstances, the magnitude of the item is such that it is probable
that the judgement of a reasonable person relying on the report would have been changed
or influenced by the inclusion or correction of the item.
ii) Accounting period:-
The concept of going concern implies that business activities will continue indefinitely
in the process of generation of income. the complete of financial affairs of the business can be
available only at the time of liquidation of the business. But information
made available only at the time of liquidation, hardly has any use. to provide timely
information, keeping in view its usefulness of time from the user, point of view, indefinite life
of business is split into shorter intervals of time which are called” Accounting Period “.
2. Financial accounting relates to the information presently based on past events & records.
Cost & managerial accounting is the presentation of financial information to the
management to be used in decision making while in managerial accounting projections are
based on past trends . For example : projected cashflows, profit & loss account, balance
sheet.