Financial Accounting Terms Final 29

Syed Tahir Hussain Lecturer
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Chapter # 1
Accounting:
Accounting is the art of recording, classifying and summarizing in a significant manner and in
terms of money, transactions and events which are in part at least, of a financial character, and
interpreting the results thereof.
Book Keeping:
Book keeping is the art of recording monetary transactions in the books of accounts in a proper
manner.
Business:
Any legal activity which is done for the purpose of earning profit is known as business.
Cash System of Accounting:

It is a system in which accounting entries are made only when cash is received or paid.
Accrual system of Accounting:

It is a system in which accounting entries are made on the basis of amount having become due
for payment or receipt.
Accountancy:
Accountancy is the main subject. The word “Accountancy” is far extensive. It covers the entire
body of theory and practice. E.g. book keeping, accounting, costing, auditing, taxation etc.
Debtors/ Accounts Receivables:

Debtors are the persons or customers to whom goods have been sold on credit basis and from
whom the business is to receive money in the near future. These are also known as “Accounts
receivables.”
Creditors/ Accounts Payables:

Creditors are the persons or suppliers from whom goods have been purchased on credit basis and
to whom the business is to pay money in the near future. These are also known as “Accounts
payables.”
Cash Discount:
It is deduction or allowance given by a creditor to a debtor if the amount is paid by the debtor
before the due date.
Assets:
Govt. Degree College (B) Lalamusa Page 1

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Assets are the properties and possessions of a business both tangible (having physical existence)
and intangible (have no physical existence).
Liabilities:
Liabilities are debts or obligations of a business.
Capital:
It is the source of funds provided by the owner/owners of the business.
Drawings:
The amount of cash or goods taken by the owner/owners from the business for his personal use is
known as “drawings”.
Separate Entity Concept:

According to this concept business is treated as a separate entity from its owners.
Going Concern Concept:

According to this concept it is assumed that the business will continue to operate for an indefinite
period of time, and there is no intention to liquidate the business in foreseeable future.
Money Measurement Concept:

According to this concept accounting records only those transactions or events, which can be
measured in terms of money.
Dual Aspect Concept:

According to this concept, “for every debit, there is an equivalent credit”.
Accounting Period Concept:

According to this concept, “the life of the business is divided into a series of relatively short
accounting periods of equal length for studying the results shown by the business”.
Matching Concept:
The concept of offsetting expanses against revenues on the basis of “cause and effect” is called
the matching concept.
Realization Concept:
According to this concept, revenue should be recognized at the time when goods are sold or
services are rendered.
Trade Discount:

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Discount allowed by the manufacturer or wholesaler to the retailer at the time of selling goods as
a deduction from the list price is called the trade discount.
Purchases:
In accounting the word “purchases “has a special meaning. When saleable goods are bought in a
business it is said that purchases have been made.
Sales:
The goods are purchased for selling purposes. When these goods are sold to customers at a
specific price, it is said that sales have been made.
Goods or Merchandise:
It refers to something which has been purchased by a trader for resale purpose or anything which
has been manufactured for selling purpose.
Returns Outwards:
Goods once purchased may subsequently be sent back to the seller for certain reasons, i.e., goods
are defective, not according to specification, damaged or below standard. Such return of goods to
the seller is known as returns outwards.
Returns Inwards:
If a customer to whom Goods have been sold on credit finds that goods are defective,
unsatisfactory, below standard or not according to specification, he may return these goods to the
seller. To the seller this return is known as returns inwards.
Cost Accounting:
The main object of cost accounting is to determine the cost of goods manufactured or produced
by the business. It also helps the management of the business in controlling the costs by
indicating avoidable losses and wastes.
Financial Accounting:
The main purpose of financial accounting is to ascertain the true results (profit or loss) of the
business operation during a particular period of time and to state the financial position of the
business on a particular point in time.
Managerial Accounting:
The object of this accounting is to communicate the relevant information periodically to the
management of the business to enable it to take suitable decision.

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Expenses:
Expenses are the costs of the goods and services used up in the process of obtaining revenue e.g.
salaries, insurance, rent etc.
Revenues:
It is a price of goods sold or services provided by a business to its customers. E.g. sales, rent
received etc.
Cost Concept:
According to this concept, “an asset is ordinarily entered on the accounting record at the price
paid to acquire it”.
Drawing:
Cash or goods taken away by the owner from the business for personal use are known as
drawing.
Chapter # 2
Transaction:
A business event which can be measured in terms of money and which must be recorded in the
books of accounts is called a “transaction”.
Cash Transactions:
If the value of a transaction is met in cash immediately, it is called cash transaction e.g. furniture
bought for cash.
Credit Transaction:
If the value of a transaction is not met in cash immediately, it is called credit transaction e.g.
furniture bought on account or on credit.
External Transaction:
A transaction taking place with an outside person or organization is called external transaction.
E.g. machine purchased from Khalid bros.
Internal Transaction:
A transaction with which no outside person or organization is involved, is called external
transaction. E.g. machine purchased from Khalid bros.
Paper Transaction:

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When there is no question of meeting the value of a transaction, it is regarded as a paper
transaction e.g. I have lost Rs 500.
Event:
Anything that takes place is called an event
Monetary Events:
Events which are related with money i.e. which change the financial position of a person are
known as “monetary events”, e.g. daily shopping, marriage ceremony etc.
Non-monetary Events:
Events which are not related with money i.e. which do not change the financial position of a
person are known as “non-monetary events”, e.g. winning a game, delivering the lecture in the
meeting etc.
Quantitative Change:
This change the total value of assets and liabilities of a business concern e.g. machinery of Rs.
50000 is destroyed. This transaction reduces the total value of assets.
Qualitative Change:
This cause increase or decrease in the different elements of assets & liabilities, but the value of
total assets and liabilities remains unchanged. Purchase of machinery for cash Rs 50000.
Accounting Equation:
The expression of the equality of an entities assets and liabilities with the claims against them is
referred to as the accounting equation i.e.
Assets = Liabilities + owner’s equity
Or
Assets = claims against them.
Equity:
Equity is the sum of liabilities and owner’s equity i.e.
Equity = liabilities + owner’s equity
Chapter # 3
Double Entry System:

The system under which both the changes in a transaction are recorded-one change is debited;
while the other change is credited with an equal amount is called double entry system.

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Single Entry System:

A system in which sometimes both aspects of a transaction are recorded, sometimes one aspect
of a transaction is recorded and sometimes no aspect of a transaction is recorded is called single
entry system.
Account:
Account is the individual record of an asset, an expense or capital account in a summarized
manner.
Nominal Account:
Accounts which are related with expenses, losses and gains are known as nominal accounts e.g.
carriage. Loss by theft etc.
Real or Property Accounts:

Accounts which are related with property or things owned by the business are known as real or
property accounts e.g. Land, Building, office equipment etc.
Personal Accounts:
Accounts which are related with persons or institutions are known as personal accounts e.g.
Habib Bank, debtor’s Account, creditors account.
Chapter # 4
Journal:
The book in which transactions are first of all recorded chronologically together with its short
description is called “journal”. It is also called “the book of original entry” or “primary entry” Or
“prime entry” or “preliminary entry” or “first entry”.
Journalizing:
Recording of a transaction in journal is called “journalizing” or “journal entry”.
Entry:
Recording a transaction in the appropriate place of the concerned account is called an entry.
Simple Entry:
An entry in which one account is debited and another account is credited is called “Simple
Entry”.
Compound Entry:

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An entry in which more than one account is debited or more than one account is credited is
called “Compound Entry:.
Narration:
A short description of each transaction which is written under each entry is called “Narration”.
Ledger Folio / Ledger Reference:

The page number of the ledger where the two concerned accounts have been posted, are
mentioned in this column. This will help in locating the entry in the ledger easily. It is used in
journal.
Chapter # 5
Ledger:
The book in which all the transactions are finally recorded in the concerned accounts in a
summarized and classified form is called ledger. It is also known as king of all accounts because
all the transactions are finally recorded in the ledger.
Posting:
The process of transferring information, debits and credits, from journal to ledger is known as
posting.
Balancing:
The process of equalizing two sides of an account is called balancing.
Balance:
The difference between the two sides of an account is its balance.
Debit Balance:
If the debit side of an account is heavier, its balance is known as debit balance.
Credit Balance:
If the credit side of an account is heavier, its balance is known as credit balance.
Zero Balance:
If both the sides of an account are equal, that account will show zero balance.
Stages of an Accounting Cycle:

Transaction Journal Ledger Trial Balance Final Accounts

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Trial Balance:
An informal accounting schedule or statement that lists the ledger account balances at a point in
time and compares the total of debit balances with the total of credit balances is called “Trial
Balance”.
Debtors Ledger & Creditors Ledger:

Debtor’s ledger contains the accounts of all the customers to whom goods have been sold on
credit whereas creditors’ ledger contains the accounts of all the suppliers from whom goods have
been purchased on credit.
Journal Folio / Journal Reference:

The page number of the journal from where the transactions have been posted is mentioned in
this column. This will help locating the entry in the journal easily. It is used in ledger.
Chapter # 6
Bill of Exchange:
“An unconditional instrument in writing, addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or
determinable future time a certain sum in money to or to the order of a specified person or to the
bearer”.
Drawer:
“A person who draws the bill of exchange is known as drawer”.
Drawee:
“A person upon whom the bill of exchange is drawn is known as drawee”.
Payee:
“A person who receives the amount of the bill of exchange is known as payee”.
Trade Bills:
Trade bills are drawn and accepted against the sale and purchase of goods on credit.
Accommodation Bills:
Accommodation bills are drawn and accepted without any sale and purchase of goods, the
purpose of such bills is to help one party or both the parties financially.
Inland Bills:
Inland bills are drawn in a country upon persons living in the same country; both the parties
reside in the same country.

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Foreign Bills:
Foreign bills are drawn in one country and accepted and payable in another country.
Tenor:
Tenor is the period of time after which a bill becomes payable e.g. 2 months, 3 months etc.
Maturity:
Maturity is the due date of the bill at which amount of the bill is paid or received.
Days of Grace:
The three additional days which are allowed to drawee after the maturity date for the payment of
boll of exchange are known as days of grace.
Endorsement of a Bill:
The procedure by which the bill of exchange is transferred from one person to another for the
settlement of debts is called “Endorsement of bill”.
Dishonor of Bill:
A bill of exchange is said to be dishonored if the accepter of the bill refuses to pay the amount of
the bill to the holder of the bill on its maturity.
Noting Charges:
The small fee which the notary public receives from the holder of the bill, in case of dishonor of
bill is known as “Noting-Charges”.
Renewal of a Bill:
The cancellation of the old bill before its maturity in return for a new bill (which includes
interest) for an extended period of time is called “Renewal of a Bill”.
Retiring of a Bill:
Retiring of a bill means paying the amount of bill before its due date under concession (Rebate).
Rebate:
Rebate is the concession in the amount of the bill paid, which is given by the drawer to the
drawee if he makes the payment before the due date. It is considered as revenue for the drawee
and an expense for the drawer.
Insolvency of a Person:

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A person is said to be insolvent, if his assets are not sufficient to pay his amount of debts.
Promissory Note:
“A promissory note is an instrument in writing (not being the bank note or a currency note)
containing an unconditional undertaking signed by the maker to pay a certain sum of money only
to or to the order of a certain person or to the bearer of the instrument”.
Chapter # 7
Subsidiary Book:
Under double entry system transactions are first of all recorded in journal and thereafter posted
to the ledger. The book which gives additional help to the ledger is known as subsidiary ledger.
General Journal:
The transactions which do not fall within the scope of special journal are recorded in this journal
e.g. purchase of an asset of credit, depreciation on asset etc. it is also known as Journal Proper,
Modern Journal or Principal Journal. Some authors call it only “journal”.
Special Journal:
By special journal we mean, a journal in which transactions relating to a certain group are
recorded. Special journal is further divided into eight journals e.g. cash journal, sales journal,
purchase journal etc.
Cash Book / Cash Journal:

A book in which all those transactions in which cash is involved, (whether the business has paid
cash or received cash) are recorded is called cash book o cash journal.
Purchase Book / Purchase Journal:

A book in which only credit purchases of goods are recorded is called purchase book or purchase
journal. It is also called Purchase Day Book, Bought Book / Bought Journal, Inward Book or
Invoice Book.
Sales Book / Sales Journal:

A book in which only credit sale of goods are recorded is called sales book or sales journal. It is
also called Sales Day Book, Outward Invoice Book or only Day Book.
Sales Return Book / Sales Return Journal:

The goods we have sold on credit if subsequently returned by the customer to us for some solid
reasons are recorded in this book. This is also known as Returns Inward Book.
Purchase Return Book / Purchase Return Journal:

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The goods we have purchased on credit if subsequently returned by us to the suppliers for some
solid reasons are recorded in this book. This is also known as Returns Outward Book.
Bills Receivable Book:

Sometimes the debtors make payment by means of accepting a bill of exchange instead of cash.
All the bills (Acceptances) received from the debtors are recorded in this book.
Bills Payable Book:

Sometimes creditors are paid by means of accepting a bill of exchange instead of cash. All the
bills (Acceptances) given to the creditors are recorded in this book.
Debit Note:
If goods bought on credit are returned to the seller for any solid reason, the buyer debits the
seller account and informs the seller through a note. This note is called “debit note”.
Credit Note:
If goods sold on credit are returned by the buyer, the seller credits the buyer account and informs
the buyer through a note. This note is called “Credit Note”.
Chapter # 8
Bank:
An institution, which purchases and sells money and tracts business of the like nature, is known
as Bank.
Types of Accounts:
1. Saving Account or PLS Saving Account
2. Fixed deposit Account
3. Current Account
PLS Saving Account:

An account in which deposits can be made only up to certain limit and the customer is not
allowed to withdraw the amount from such account twice or thrice a week is called PLS saving
account. It is also known as saving account or profit or loss saving account.
Fixed Account:
In fixed account, the amount can be withdrawn from bank only after the fixed determinable
period of time. The bank allows high rate of interest on fixed accounts.
Current Account:
In current account a customer is allowed to deposit or withdraw the money from the bank
according to his own will. Generally, bank allows no interest on current account.

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Bank Overdraft:
The amount, which a bank allows to a customer to withdraw in excess of his deposits for the
sake of depositor’s goodwill, is called bank overdraft.
Cash Account:
Cash account is an account in a ledger in which posting of only cash transactions are made from
journal.
Voucher:
Any written evidence in support of a business transaction is known as voucher.
Bank Pass Book:

Pass book is copy of the depositors account in the banks ledger, which provided to the depositor.
This book is prepared by the bank but kept with the depositor.
Pay-In-Slip:
Pay-In-Slip is used to deposit the amount in the bank.
Cheque Book:
Cheque book is used to withdraw the money from the bank.
Endorsement of the Cheque:

The holder of the cheque may transfer the cheque in favor of his creditor for the clearance of his
debts. This process is known as “Endorsement of Cheque”.
Dishonor of Cheque:
Sometimes there may be a mistake in writing a cheque or the amount deposited in the bank is
less than the amount written on cheque drawn, in such a case the bank refuses to make the
payment and the cheque is called “Dishonored Cheque”.
Single Column Cash Book:

It is a cash book in which only cash transactions are recorded.
Double Column Cash Book:

In double column cash book, two columns of amount are provided on each side of cash book.
One for cash and other for bank.
Treble Column Cash Book:

In treble column cash book, three columns of amount are provided on each side of cash book i.e.
cash bank and discount.

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Contra Entry:
An entry in which cash account and ban account are involved and it is recorded on both sides of
cash book is called contra entry.
Bank Reconciliation Statement:

If there arises any discrepancy between the balance of the cash book and that of the pass book,
the depositor prepares a statement to explain the causes of discrepancies and to reconcile the two
balances. This statement of explanation is known as bank reconciliation statement.
Petty Cash Book:

The book in which small payments, which are not convenient to record in the main cash book
(like postage, traveling expense, purchases of stationary etc.) are recorded is called petty cash
book.
Imprest System:
A system in which a fixed sum of money is given to the cashier to cover the petty expenses for
the month is called imprest system.
Unpresented Cheques:
All those cheques, which are issued by the customer for payment, but not presented for payment
in the bank, are called unpresented cheques or cheques issued but not presented for payment.
Uncredited Cheques:
All those cheques which are deposited in the bank by the customer but the bank has not credited
the amount of these cheques to the customers bank account are called uncredited cheques or
cheques deposited but not collected by the bank.
Chapter # 9
Journal Proper / General journal:

The books of accounts where all the transactions for which there are no special journals are
primarily recorded is known as “Journal Proper or General Journal”.
Opening Entries:
At the beginning of every year, new books of account are opened. The closing balances of all the
accounts (Assets A/C, Liabilities A/C and Capital A/C) will be the opening balances of new
year. Entries are necessary to bring these balances in the books of accounts of the New Year.
These entries are known as “opening entries”.

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Closing Entries:
At the end of each accounting period, all the accounts relating to expenses and revenues are
closed by transferring their balances to trading and profit and loss account. Entries are necessary
for such transfer, which are known as “closing entries”.
Adjustment Entries:
At the end of the accounting period, when final accounts are prepared, some items of revenue
and expenses require adjustments e.g. outstanding expenses, prepaid expenses etc. entries are
necessary to record these adjustments and are known as “adjustment entries”.
Rectifying Entries:
If there is any error in the books of accounts, it must be rectified, but errors are not rectified by
erasing the wrong figures. All errors are rectified by passing fresh journal entries. These entries
are known as “rectifying entries”.
Transfer Entries:
Any transfer of amounts from one account to another account is done by passing fresh journal
entries. Such entries are known as “transfer entries”.
Residuary Entries:
All those transactions, which cannot be recorded in any special journal, are known as residuary
transactions and entries for such transactions are known as “residuary entries”.
Chapter # 10
Stages of an Accounting Cycle:

Transaction Journal Ledger Trial Balance Final Accounts
Trading Account:
Trading account shows the grass results (Gross profit and Gross loss) of the business.
Profit & Loss Account:

Profit & Loss account shows the net results (net profit and net loss) of the business.
Balance Sheet:

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It is a statement of assets, liabilities and owners equity, which shows the financial position of the
business on a particular date. It is also called position statement and statement of financial
condition.
Marshalling:
An arrangement in which assets and liabilities are shown in the balance sheet is known as
marshalling.
Fixed Assets:
Assets which have long life and which are bought for use in business for long period of time are
called fixed assets. E.g. Land, Building, Furniture etc.
Real Assets:
Assets, which have some market value, are known as real assets e.g. building, machinery, cash,
goodwill etc.
Fictitious Assets:
Assets, which have no market value, are known as fictitious assets e.g. preliminary expenses,
loss on issue of shares or debentures etc.
Wasting Assets:
Those assets whose value gradually reduces on account of use and finally exhausts completely
are called wasting assets e.g. mine, forest etc.
Tangible Assets:
Assets which have physical existence and which can be seen, touched or felt are called tangible
assets e.g. building, machinery, cash etc.
Intangible Assets:
Assets which have no physical existence and which cannot be seen, touched or felt are called
intangible assets e.g. goodwill, trade mark, copy right etc.
Current Assets:
Assets which have short life and which can be converted into cash quickly to meet short term
liabilities are called current assets e.g. stock, debtor, cash etc.
Liquid or Quick Assets:

Assets which can be converted into cash very quickly or which are already in cash form are
called Liquid or Quick Assets e.g. debentures, cash in hand, cash at bank etc.

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Current Liabilities:
The debts, which are repayable within a short period of time, are called current or short-term
liabilities e.g. creditors, bills payable, bank overdraft etc.
Fixed Liabilities:
Fixed liabilities, which are repayable after a long period of time e.g. debenture, loan on
mortgage, capital etc.
Contingent Liabilities:
Contingent liability is not a liability at present but May or may not become liability in the future.
It depends upon certain future events.
Deferred Liabilities:
The debts, which are repayable within one year but more than one month are called deferred
liabilities e.g. short-term loan.
Liquid or Quick Liabilities:

The debts, which are repayable within the course of one month, are called liquid or quick
liabilities e.g. bank overdraft, outstanding expenses, creditors etc.
Internal Liabilities:
The total amount of debts payable by a business to its owners are called internal liabilities e.g.
capital.
External Liabilities:
The total amount of debts payable by a business to the outsiders (other than the owners) are
called external liabilities e.g. creditors, bills payable etc.
Capital:
The amount of goods or cash invested by the owner or owners in a business unit is known as
capital or owners equity.
Direct Expenses:
Expenses connected with the purchase of goods are known as direct expenses e.g. freight, wages,
carriage inward etc.
Indirect Expenses:

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All those expenses other than direct expenses are known as indirect expenses e.g. rent, salaries,
legal charges etc.
Direct Revenue:
The revenue earned in routine business activities is known as direct revenue e.g. sales.
Indirect Revenue:
Any revenue arising from sources other than normal business activities are known as indirect
revenues. E.g. interest received, commission received, dividend received.
Normal Loss:
Loss which arises due to handling of goods, breakage, and shrinkage is known as normal loss. It
is not recorded in the books of account.
Abnormal Loss:
Loss, which arises due to fire, flood or some other abnormal reasons, is known as abnormal loss.
It is recorded in the books of accounts.
Chapter # 11
Adjustment:
An adjustment means to make a correct record of a transaction which has not been entered or
which has been entered but in an incorrect or wrong way.
Cash System of Accounting:

Under this system of accounting, transactions are recorded only when cash is paid or received,
whether they related to current year or not.
Accrual System of Accounting:
The system under which all items of revenue and expenses relating to the current accounting
period whether received or paid in cash or not are taken into consideration while determining the
profit or loss of the business, is called Accrual or Mercantile system of accounting.
Outstanding Expenses:
The expenses which have been incurred during current year but have not been paid till the end of
the current year are called outstanding expenses, accrued expenses or expenses payable. E.g.
wages payable, accrued salaries etc.
Prepaid Expenses:

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The expenses, which have been paid during current year but the services or benefits against
them, have not been received till the end of the current year, are known as prepaid expenses,
unexpired expenses or expenses paid in advance. E.g. prepaid wages, prepaid salaries etc.
Accrued Revenue:
The Revenue, which has been earned during current year but has not been received in cash till
the end of the current year rather it will be received in next year, is known as Accrued Revenue
or Revenue Receivable. E.g. rent receivable, accrued commission (Cr) etc.
Unearned Revenue:
Revenue, which has not become due but has been received in advance, is known as unearned
revenue. E.g. unearned commission, rent received in advance etc.
Depreciation:
Gradual decrease in the monetary value of an asset due to its usage in the business is known as
depreciation. Depreciation is a loss to the business.
Accumulated Depreciation:
The sum or total of the depreciation expenses in the different accounting years is called
accumulated depreciation.
Debts:
Amount receivable by the business from its debtors is known as Debts.
Bad Debts:
The debts, which are irrecoverable from the debtors, are called bad debts and the concerned
debtors are called bad debtors.
Doubtful Debts:
The debts, the recovery of which is doubtful or uncertain are known as doubtful debts. It is
expected loss of the business.
Bad Debts Recovered:

The debts, which are written as bad, if recovered in the future are called bad debts recovered.
Allowances for Uncollectable / Provision for Doubtful Debts:

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The provision, which is maintained for doubtful debts in future, is known as Allowances for
Uncollectable or Provision for Doubtful Debts.
Provision for Discount on Debtors:

Provision, which is created for those debtors, who pay their debts within discount period, is
known as Provision for Discount on Debtors. It is possible loss of the business.
Provision for Discount on Creditors:

Provision, which is created at the end of the year for the estimated amount of discount receivable
from creditors, is known as Provision for Discount on creditors. It is possible revenue of the
business.
Chapter # 12
Work Sheet:
A work sheet is a large columnar sheet of paper, especially designed to arrange in a convenient
and systematic form, all the accounting data, required at the end of the period. It is not a
permanent record but it is a working paper of an accountant.
Income Statement:
A statement, which is prepared to ascertain the net income or net loss of the business for a
specific accounting period, is known as income statement.
Chapter # 13
Financial Statement:
Statements prepared to show the financial position of the business are known as financial
statements.
Operating Expenses:
The expenses which are incurred for the generation of revenue from the sale of goods are called
operating expenses.
Selling Expenses:
All expenses regarding sale of goods and sending goods to the buyer are called selling expenses.
E.g. carriage outward, advertisement, salesman's salaries etc
Administrative Expenses:
All expenses connected with the office and it's administration are called administrative expenses.
E.g. Office salaries, office rent, printing and stationary etc.

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Cost of Goods Sold:

It represents the sum of the cost of all goods, which have been sold during the accounting period.
Cost of goods sold = Opening stock + Purchases - Closing Stock.
Chapter # 14
Capital Expenditures:
An expenditure, which results in the acquisition of permanent asset in the business for the
purpose of earning revenue, is known as capital expenditure.
Revenue Expenditure:
All those expenditures which are incurred in the day-to-day conduct and administration of a
business and the effect of which is completely exhausted within the current accounting year are
known as revenue expenditures. These are also known as Expenses or Expired costs.
Deferred Revenue Expenditures:

Revenue expenditures, the benefits of which are not confined to one accounting year, they extend
to future accounting year or years are known as deferred revenue expenditures.
Capitalized Expenditures:
Some expenditures although of revenue nature basically, are directly connected with the fixed
assets and spent directly on the acquisition of fixed assets, such expenditures are added to the
cost of the assets and are called capital expenditures. E.g. Installation of an asset.
Revenue Receipts:
Receipts which are non-recurring (not received again and again) by the nature and which are
available for meeting all day-to-day expenses of the business concern are known as revenue
receipts. E.g. Sale proceeds of goods, interest received, and commission received etc.
Capital Receipts:
Receipts which are non-recurring (not received again and again) by nature and whose benefit is
enjoyed over a long period are called capital receipts. E.g. Money brought into business by the
owner, long term loan from bank, sale proceeds of fixed assets.
Capital Payment:
The amount, which is actually paid on account of capital expenditure, is known as capital
payment. E.g. Machinery purchased for Rs.50000 from Tahir & Co., Rs.30000 paid to them in
cash, agreeing to pay Rs.20000 after one month. In this case Rs.30000 is a capital
payment.
Revenue Payment:
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The amount, which is actually paid on account of revenue expenditure, is known as revenue
payment. E.g. Goods purchased for Rs.15000 this is revenue expenditure but if we pay Rs.10000
out of this sum then Rs.10000 will be revenue payment.
Capital Profit:
Capital profit is a profit, which is earned on the sale of fixed assets, or profit earned on raising
capital for a company (by issuing shares at premium) is known as capital profit. E.g. Machinery
having book value of Rs.50000 is sold for Rs.60000 the profit of Rs.10000
will be capital profit.
Capital Loss:
Loss suffered by a business on the sale of a fixed asset or it is incurred on raising capital for a
company (by issuing shares at discount) is known as capital loss. E.g. Machinery having book
value of Rs.50000 is sold for Rs.45000 the loss of Rs.5000 will be capital loss.
Revenue Profit:
This is a profit which is earned during the ordinary course of business e.g. Profit on sale of
goods, rent received, interest received etc.
Revenue Loss:
Loss suffered by a business in the ordinary course or day-to-day conduct of a business is known
as revenue loss. E.g. Loss on sale of goods
Chapter # 15
Error of Omission:
An error in which a transaction has been completely omitted from the original books of accounts
is known as error of omission. E.g. Goods sold to Shakeel have been omitted to record in the
sales journal.
Errors of Principal:
Errors which arise out of ignorance of the fundamental principles of accounting are known as
error of principal. E.g., repair of furniture has been wrongly debited to furniture account.
Error of Commission:
An error in which a transaction instead of being recorded in the right account, has been recorded
in a wrong account of the same class, is known as error of commission. E.g. Sales of goods to
Amir wrongly debited to Anwar account.
Compensating Errors:
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It means that some errors in amount have occurred on the opposite sides of two or more accounts
and have cancelled themselves in the net result are called compensating errors.
Error of Posting:
An error in which amount is posted to the wrong side of the same account is known as error of
posting. E.g., goods sold to Arshad wrongly credited to his account.
Error of Casting:
An error due to which total of an account is more or less recorded is known as error of casting.
E.g., sales book has been under castes by Rs.500
Errors of Book Keeping:

Errors which are made in the original documents (journal or ledger) are called book-keeping
errors.
Errors of Trial Balance:

Errors, which are made in the preparation of trial balance, are called trial balance errors.
Suspense Account:
A suspense account is an account in which those transactions are entered which cannot be placed
to their proper accounts.
Chapter # 16
Single Entry System:

A system in which sometimes one aspect of a transaction is recorded sometimes both aspect of a
transaction are recorded and sometimes no aspect of a transaction is recorded, is known as single
entry system.
Records Kept Under Single Entry System:

1. A day book or general journal
2. A cash book
3. Ledger accounts for individual customers and creditors
Double Entry System:

A system in which both the aspect of a transaction are recorded, one aspect is debited while the
other aspect is credited with the same amount, is known as double entry system.

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Statement of Affairs:
Statement of affairs is a sort of balance sheet having assets in the left side and liabilities and
capital on the right side under single entry system.
Increased Net Worth Method:

The method in which adjusted capital at the end and capital in the beginning are compared to
ascertain the profit or loss under single entry system.
Chapter # 17
Non-profit Making Organization:

Non-profit making organizations are those, which do not buy/manufacture and sell goods and
whose primary object is not to earn profit. Their object is to do good to the society through
welfare activities; e.g. Clubs, schools, colleges, hospitals, libraries etc.
Receipts and Payments Account:

A receipt and payments account is a summarized cash book (Cash and Bank) for a given period.
Income and Expenditure Account:

The account through which surplus or deficit of a non-profit making organization is ascertained,
is called income and expenditure account.
Subscription:
The amount received from the member of organization monthly or annually as per rules is called
subscription.
Special Subscription:
The additional subscription collected from the members over and above the regular subscription
for some special purpose such as construction of club's own building, charities to poor, warding
prizes etc. is known as special subscription.
Admission Fee:
The amount which is paid by a new member at the time of admission in addition to subscription
is called admission fee.
Legacy:

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Legacy refers to property received by virtue of a will of a person after his death. Acquisition of
such property by an institution is regarded as capital receipt.
Life Membership Fee:

The amount which is paid by members in lump sum to become a life member of organization I
called life membership fee.
Donation:
Amount received from members and general public By way of a gift is known as donation. It is
to be treated as capital or revenue depends upon the purpose for which the donation is collected.
Capital Fund:
Excess of total assets over total external liabilities of a non-profit seeking organization is called
capital fund. It is also known as general fund, accumulated fund or surplus fund.
Chapter # 18
Partnership:
According to partnership act 1932, "the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all".
Essentials of Partnership:
1. There must be an agreement entered into by all the persons concerned.
2. The agreement must be to share the profits of a business.
3. The business must be carried on by all or any of them acting for all.
Partnership Agreement/Deed:
The document in writing containing the various terms and conditions as to the relationship of the
partners to each other is called the 'partnership deed'.
Rules Applicable in the Absence of an Agreement in Partnership:

I. The partners shall share equally the profits and losses.
II. A partner shall be entitled to interest at the rate of six percent per annum on the loan
advanced by him to the firm.
III. A partner is not entitled to any salary for taking part in the conduct of the business.
IV. No partner is entitled to interest on the capital.
V. No interest on the drawing is to be charged by the firm.

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Fluctuating Capital:
When the capitals of the partners are fluctuating, all the adjustments with regard to the interest
on capitals, interest on drawings, partner’s salaries etc. are passed through the capital accounts of
partners.
Fixed Capitals:
In such a case the capital of the partners is credited with the actual contribution of the partners
towards his capital and is balanced at the same figure from year to year. In such a case all the
adjustments are passed through current accounts of partners.
Normal Profits:
The normal profits are calculated by multiplying the average capital employed with the rate of
general expectation.
Super Profits:
Super profit is the excess of actual profit over normal profit.
Goodwill:
The benefit and advantage of the good name or reputation of a business is called goodwill. It is
the attractive force which brings in customers.
Residuum Approach for Goodwill:

In the residuum approach; goodwill is defined as the difference between the purchase price and
the fair market value of an acquired company's assets.
Excess Profits Approach for Goodwill:

In the excess profits approach, goodwill is the difference between the combined company's profit
over normal earnings for a similar business.
Purchased Goodwill:
The excess of the purchase price of the acquired business over the fair market value of its
tangible and identifiable intangible assets is known as purchased goodwill.
Non-Purchased Goodwill:
The economic value of a business internally developed is known as non-purchased goodwill such
as name, developed markets, managerial talents, labor force, government relations, ability to
finance operations easily etc. it is not shown in balance sheet.

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Positive Goodwill:
Positive goodwill arises when the value of the business as a whole is more than the fair value of
the separate net assets.
Negative Goodwill:
If the real worth of the business is less than the sum of the fair value of the separate net assets, it
represents negative goodwill.
Average Profit Method for valuation of Goodwill:

According to this method, the average of given number of past years is multiplied by an agreed
number and this is considered as the value of Goodwill.
Super Profits Method for Valuation of Goodwill:

Under this method super profit is multiplied by an agreed figure to find the value of goodwill.
Capitalized Method for Valuation of Goodwill:

In this method, the whole value of business is calculated by capitalizing the average or actual
profits by the following formula: Actual profits/Normal rate of return *100
Premium Method for treatment of Goodwill:

a) The amount of goodwill is paid privately by the incoming partner to the old partners.
b) The value of goodwill attributable to incoming partner's share of profit is brought in cash
and the amount is retained in the business.
c) The value of goodwill attributable to incoming partner's share of profit is brought in cash
and the amount is withdrawn by the old partners.
Revaluation Method for Treatment of Goodwill:

Under this method, the incoming partner does not bring in the amount of goodwill in cash, but a
goodwill account is raised in the books at full value.
Memorandum Revaluation Method for treatment of Goodwill:

Under this method, incoming partner does not being in the amount of goodwill in cash, a good
will account is raised in the books at full value and is then immediately written off.
Revaluation Account:
It is prepared at the time of admission, retirement or death of a partner for increase and decrease
in the value of assets and liabilities. In the case of revaluation account the assets and liabilities
are shown in the new balance sheet at the revalued figures.

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Memorandum Revaluation Account:

It is prepared at the time of admission, retirement or death of a partner, if the partners agree to
keep the book values of assets and liabilities unchanged or unaltered.
Gaining Ration and Sacrifice Ratio:

Gaming ratio is calculated in the event of retirement or death of a partner, whereas the sacrifice
ratio is calculated on the admission of a partner
Gaining Ratio = New Partner - Old Partner
Sacrifice Ratio = Old Partner - New Partner
Dissolution of the Firm:

According to the partnership act 1932, the dissolution of partnership between all the partners of a
firm is called dissolution of firm.
Distinction between Dissolution of Partnership and Dissolution of Firm:

The dissolution of partnership does not necessarily involve dissolution of the firm, whereas
dissolution of the firm involves dissolution of partnership also.
Methods of Dissolution of Firm:

1: Dissolution by agreement 2: By notice 3: Breach of partnership act
4: Contingent dissolution 5: By court
Dissolution by Agreement:
A firm maybe dissolved with the consent of all the partners in accordance with the contract
between the partners.
Dissolution by Notice of Partnership at will:

Where the partnership is at will, the firm maybe dissolved by any partner giving notice in writing
to all the other partners of his intention to dissolved the firm.
Compulsory Dissolution or Dissolution by the Operation of Law:

A firm is compulsory dissolved:
a) By the adjudication as Insolvent of all the partners or of all the partners but one, or,
b) By the happening of any event which makes it unlawful for the business of the firm to be
carried on or for the partners to carry it on in partnership.

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Dissolution on the Happening of Certain Contingencies:

Subject to contract between the partners, a firm can be dissolved:
a) By the expiry of the term fixed.
b) By the completion of the adventure or undertaking.
c) By the death of a partner.
d) By the insolvency of a partner
Dissolution by Court:
a) Where a partner has becomes of unsound mind;
b) Where a partner has become permanently incapable of performing his duties as a partner;
c) Where a party is guilty of misconduct;
d) Where a partner commits willful or president breaches of agreement;
e) Where a partner has transferred the whole of his interest in the firm to a third party
f) Where the business of the cannot be carried except at a loss;
g) Where on any other ground the court is satisfied that it is just an equitable that the firm
should be dissolved.
Garner Vs Murray Decision:

According to this decision, the deficiency on the unsolved partner's capital account must be
borne by other solvent partners in the proportion to their capitals, after each solvent partner has
brought in cash equivalent to his share of loss on realization.
Chapter # 19
Depreciation:
Depreciation is the gradual decrease in the efficiency of an asset expressed in monetary terms
because of its usage in business and wear and tear.
Internal Depreciation:
Depreciation which occurs for certain inherent normal causes is known as internal depreciation.
Such as wear and tear and depletion
Wear and Tear:

The change in the shape of an asset due to use in business is known as wear and tear.
Depletion:
The decrease in the value of wasting assets proportionate to the quantum of production is known
as depletion e.g. mines quarries, oil wells, forests etc.
External Depreciation:

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Depreciation caused by some external reasons is called external depreciation. Such as
obsolescence, efflux of time and accident
Obsolescence:
The decrease in the value of an asset due to new inventions, change in habit and tastes of people,
improvement is known as obsolescence.
Fluctuation:
The decrease or increase in the market value of an asset not due to use in business is known as
fluctuation.
Amortization:
The decrease in the value of intangible assets such as patents, copy rights, goodwill etc.
Cost Price of an Asset:

It includes all expenses involved in carrying and installing the asset to the site.
Market Price of an Asset:

The price at which an asset can be sold in the market is called market price.
Working Life of an Asset:

The period during which an asset will help earning income for the business is called its working
life.
Scrap value of an Asset:

The price at which an asset will be sold at the end of its working life is known as scrap value of
an asset. It is also known as residual value or breakup value.
Revenue Reserve or Simple Reserve:

Profit earned by a business through its normal activities is determined at the year’s end through
profit & loss A/C. The portion of such profit which is not paid to the proprietor, but kept apart is
known as revenue reserve.
General Reserve:
Reserve which is created not for any specific purpose, but for strengthening the financial position
of the business, is known as general reserve. E.g. Reserve fund, contingency fund etc
Specific Reserve:

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Reserve created for any special purpose is known as specific reserve. E.g. Dividend equalization
find, debenture sinking fund etc.
Capital Reserve:
Profit may arise from sources other than normal trading activities. Such profit is known as capital
profit. Any reserve created out of such profit is called capital reserve.
Secret Reserve:
Reserve which is not disclosed through balance sheet or the books of accounts is called secret
reserve.
Reserve Fund:
If the amount of reserve is invested outside the business in Govt. Papers or in gilt-edged
securities, then it is known as reserve fund.
Provision:
Provision means providing for possible loss or liability, the amount of which cannot be
determined exactly e.g. Provision for doubtful debts.
Fixed Installment Method:

Under this method depreciation of an asset will be equal in each accounting year.
Reducing Balance Method:

Under this method depreciation is calculated on the book value of an asset.

Financial Accounting Terms Final 29

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Financial Accounting Terms Final 29

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Syed Tahir Hussain Lecturer

Cash System of Accounting:

Accrual system of Accounting:

Debtors/ Accounts Receivables:

Creditors/ Accounts Payables:

Govt. Degree College (B) Lalamusa Page 1

Separate Entity Concept:

Going Concern Concept:

Money Measurement Concept:

Dual Aspect Concept:

Accounting Period Concept:

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Double Entry System:

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Single Entry System:

Real or Property Accounts:

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Ledger Folio / Ledger Reference:

Stages of an Accounting Cycle:

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Debtors Ledger & Creditors Ledger:

Journal Folio / Journal Reference:

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Cash Book / Cash Journal:

Purchase Book / Purchase Journal:

Sales Book / Sales Journal:

Sales Return Book / Sales Return Journal:

Purchase Return Book / Purchase Return Journal:

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Bills Receivable Book:

Bills Payable Book:

PLS Saving Account:

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Bank Pass Book:

Endorsement of the Cheque:

Single Column Cash Book:

Double Column Cash Book:

Treble Column Cash Book:

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Bank Reconciliation Statement:

Petty Cash Book:

Journal Proper / General journal:

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Stages of an Accounting Cycle:

Profit & Loss Account:

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Liquid or Quick Assets:

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Liquid or Quick Liabilities:

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Cash System of Accounting:

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Bad Debts Recovered:

Allowances for Uncollectable / Provision for Doubtful Debts:

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Provision for Discount on Debtors:

Provision for Discount on Creditors:

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Cost of Goods Sold:

Deferred Revenue Expenditures: