BASIC ACCOUNTING TERMS

 Entity
An Entity means an Economic unit which performs Economic activities. An Economic unit may be:
 Business entity (Enterprise)
 Non-business entity.
 Business Transaction

 Account
It is a Record of transactions under that head.
 It is a record of transactions (both cash and credit) under a particular head of account (say
Sales, Purchases, Salaries, Rent, Olivia, Cash, etc.).
 It shows the amounts of transactions and also their effect and direction.
 Capital
Capital is the amount. invested in an enterprise by the Proprietor (in case of proprietorship or by
Partners (in partnership business).
 In the case of Companies contributors of capital are many and they are known as
Shareholders.
 Capital is a internal liability of the firm towards the proprietor or partners or shareholders.
 Capital is also known as Owner's Equity or Net Worth.
 It is always equal to Assets less Outside Liabilities.
 It can be expressed as:
 Capital = Assets - Outside Liabilities
 Drawings
"Any Cash or Goods withdrawn by the Owner for personal use are called drawings.
 Liability
It refers to the amount which the firms is liable to pay to outsiders (except capital).
 Liabilities = Assets – Capital
 Liabilities may be further classified into two parts as under:
o Long-terms or Non-Current Liabilities - These refer to those liabilities which fall due
for payment in a relatively long period (normally after more than one year).
o For Example - Long Term Loans and Debentures etc.
o Current Liabilities - Current liabilities refer to those liabilities which are to be paid in
near future (normally within one year).
o For Example - Bank Overdraft, Bills Payable, Creditors, Outstanding, Expenses and
Short Term Loans etc.

 Assets
Assets are the properties (tangible assets and intangible assets) owned by an entity or enterprise.
They are the economic resources of the business which will give benefit in future.
 Characteristics of assets are:
o It should be owned (ie., property) by the business.
o It may be in tangible (physical) form or intangible form.
o It should have some value attached to it.
o It should be capable of being measured in money terms.
  Non Current Assets - Assets owned by the entity not meant for resale. Examples of non-
current assets are Fixed assets, Non-current Investments, Long-term Loans and Advances
and Other Non- current Assets.
 Current Assets - Current Assets are those assets which are held by an entity or enterprise
with the purpose of converting them into cash within a short period, ie, one year. For
example - Stock.
 Fictitious Assets - Fictitious Assets are expenses or losses not written off in the year in
which they are incurred but are written off in more than one accounting period. An
example of fictitious asser is Deferred Revenue Expenditure such as Advertisement
Expenditure.
 Fixed Assets - Fixed assets are those non-current assets of an enterprise which are held
with the purpose to increase its earning capacity. Fixed assets are further classified into:
o Tangible Assets - Assets having physical existence.
o Intangible Assets - Assets not having physical existence.
 Purchases
'Purchases' means purchase of goods for resale or raw materials for manufacturing of goods. It
includes both cash and credit purchases of goods.
 Sales
'Sales' means sale of goods. It includes both cash and credit sales.
 Goods
Goods purchased for resale or raw material purchased for manufacturing product.
 Stock/Inventory
Stock (Inventory) is a current asset held by an enterprise for the purpose of sale in the ordinary
course of business or for the purpose of using it in the production of goods meant for sale.
 Stock or Inventory of Goods
 Stock or Inventory of Raw Materials
 Work-in-Progress
 Trade Recievables
It refers to the amount received or receivable on account of sale of goods or services rendered by
the company in the normal course of business. Trade receivables include both Debtors and Bills
Receivables.
 Debtors: The terms 'Debtors' represents those persons or firms to whom goods have
been sold or services rendered on credit and payment has not been received from them.
 Bill Receivable: It is an accounting term for bills of exchange drawn on debtors. The
amount specified in such a bill is receivable at a future date.
 Trade Payables
Trade Payables is the amount payables on account of goods or services taken in the normal course
of business. Trade Payables include both 'Creditors' and 'Bills Payables'.
 Creditors: The terms 'Creditors' represents those person or firms from whom goods have
been purchased or services procured on credit and payment has not been made to them.
 Bills Payable: Bills Payable is an accounting term for bills of exchange accepted in favour
of creditors. The amount specified in such a bill is payable at a future date.
 Cost
It is the amount of expenditure incurred on a specified article, product or activity.
 Voucher
An evidence of transaction having taken place.
 Voucher is of two types, i.e., Source Voucher and Accounting Voucher.
 Source Voucher- It is an evidence of a business transaction.
 Examples of voucher are Cash Memo, Invoice or Bill, Receipt, Debit/Credit Notes, etc.
 Accounting Voucher- It is prepared from the Source Vouchers showing the account
heads debited and credited.
 Discount
It is the reduction in the price of goods or from the amount to be paid to a customer by the
enterprise.
 Discount allowed may be Trade Discount, Cash Discount or Rebate.
 Trade Discount: Reduction allowed on the listed values of good at the buying time.
 Cash Discount- Reduction in amount payable or receivable due to timely payment. Means
it is given at payment time.
 Receipts
Receipt is the amount of cash received from a specific event.
 Revenue Receipts - It is the amount received in the normal course of business or from use
of business resources. For Example - Amount received against sale of goods.
 Capital Receipts - Capital receipts are the receipts which are not revenue receipts. For
example - Capital contribution by owners, Receipts from sale of fixed asset.
 Expenditure
Expenditure is the amount spent on purchasing assets, goods or services.
 Capital Expenditure - Expenditure incurred to purchase or improve fixed assets.
 For example - Purchase of building, furniture, etc.
 Revenue Expenditure - Expenditure whose benefit is consumed within the accounting
period
 For example - Salary, Rent paid, etc.
 Deferred Revenue Expenditure - It is a revenue expenditure in nature but is written off
(charged) to Profit & Loss Account in more than one accounting period because it is
estimated that benefit of such expenditure will be available in more than one financial
year.
 For example - Large advertising expenditure.
 Expense
Expense is the cost incurred for earning revenue. It is a value which has expired during the
accounting period.
 Prepaid Expense - It is an expense that has been paid in advance and the benefit of which
will be available in the following year or years.
 Outstanding Expense - It is an expense that has been incurred during the accounting
year but not paid
 Income
Income is the profit earned during an accounting period. It is a broader term than 'profit' and
includes profit from activities other than its Operating Activities.
 Income = Revenue + Other Income – Expenses
 Profit
Profit means income earned by the business from its Operating Activities. Operating Activities are
activities a business performs to sell a product.
 Profit = Sales - Cost of goods sold (COGS)
 Net Profit-Net Profit is the profit after deducting indirect expenses and non operating
expenses from Gross Profit plus Non-operating income.
 Gross Profit-Gross Profit is the difference between revenue from sales and/or services
rendered and its direct cost.
 Gain
A financial benefit from events or transactions that are not part of a company's normal
[Link] is a profit that arises from transactions which are not the Operating, i.e., business
activities of the business but are incidental to it such as gain on sale of land, machinery or
investments.
 Loss
Loss is excess of expenses of a period over its revenues and other Income. It is a broad term and
includes loss incurred in its operating (business) activities, money or money's worth lost against
which the firm receives no benefit, e.g., cash or goods lost in theft and loss arising from events of
non-recurring nature,
e.g., loss on sale of fixed assets.

Note - It decreases the owner's equity.

 Other Important Accounting Terms
 Entry-When a transaction or event is recorded in the books of accounts, it is called 'entry'.
 Bad Debts- It is the amount that has become irrecoverable from a debtor. It is a business
loss & is debited to Profit & Loss Account as an expense.
 Insolvent- A person or an enterprise which is not in a position to pay its debts is called
Insolvent.
 Solvent- A person or an enterprise which is in a position to pay its debts is called solvent.
 Financial Statements or Final Accounts- Statements prepared at the end of the
accounting period to determine financial performance & financial position.
 Rebate- Reduction allowed in the sale value due to (say) poor quality, excess supply, etc.
 Investments- It refers to deployment of funds in the shares or debentures of Companies
with the intention of earning a return.
 Livestock- Domestic animals, such as cattle or horses are known as livestock.
 Turnover- It means total sales made in a particular period.
 Balance Sheet- A statement of balances of assets and liabilities.
 Book Value- Value of asset as existing in the books of account.
 Credit- Traditionally, right side of an account is the credit side.
 Debit- Traditionally, left side of an account is debit.
 Depreciation- Depreciation is fall in the book value of an asset because of usage or with
efflux of time or obsolescence or accident.
 Proprietor- The person who invests amount in business and bears all the risks associated
with the business is called Proprietor.