FUNDAMENTALS OF ACCOUNTING

Basic Accounting Terms:

1. Transactions:
Transactions are those activities of a business, which involve transfer of money or
goods or services between two persons or two accounts. For example, purchase of
goods, sale of goods, borrowing from bank, lending of money, salaries paid, rent paid,
commission received and dividend received. Transactions are of two types, namely,
cash and credit transactions.
Cash Transaction:
Cash Transaction is one where cash receipt or payment is involved in the
transaction.
For example, When Ram buys goods from Kannan by paying the cash immediately,
it is a cash transaction
Credit Transaction:
Credit Transaction is one where cash is not paid or received immediately but will be
paid or received later.
In the above example, if Ram, does not pay cash immediately but promises to pay
later, it is credit transaction.
Every transaction has two aspects. A giving aspect and a receiving aspect. Debit
aspect and Credit aspect. The receiving aspect is known as Debit. The giving aspect
is called Credit.
Example: Suppose you are buying a note book by paying Rs. 50. This is a
transaction. The giving aspect is paying cash of Rs. 50 (Credit). The receiving aspect
is getting a book worth Rs.50. (Debit)
2. Proprietor:
A person who owns a business is called its proprietor. He contributes capital to the
business with the intention of earning profit.
3. Capital:
It is the amount invested by the proprietor/s in the business. This amount is
increased by the amount of profits earned and the amount of additional capital
introduced. It is decreased by the amount of losses incurred and the amounts
withdrawn. For example, if Mr. Anand starts business with Rs.5,00,000, his capital
would be Rs.5,00,000.
4. Assets:
Assets are the properties of every description belonging to the business. Cash in
hand, Land and Building, Patent, copy right, good will, plant and machinery,
 furniture and fittings, bank balance, debtors, bills receivable, stock of goods,
accrued income, unexpired expenses ie prepaid expense, investments are examples
for assets. Assets can be classified into tangible and intangible.
5. Tangible Assets: These assets are those having physical existence. It can be seen
and touched. For example, plant & machinery, cash, etc.
6. Intangible Assets: Intangible assets are those assets having no physical existence
but their possession gives rise to some rights and benefits to the owner. It cannot
be seen and touched. Goodwill, patents, trademarks are some of the examples.
7. Liabilities:
Liabilities refer to the financial obligations of a business. These denote the amounts
which a business owes to others, e.g., loans from banks or other persons, creditors
for goods supplied, bills payable, outstanding expenses, bank overdraft etc.
8. Drawings:
It is the amount of cash or value of goods withdrawn from the business by the
proprietor for his personal use. It is deducted from the capital.
9. Debtors:
A person (individual or firm) who receives a benefit without giving money or
money’s worth immediately, but liable to pay in future or in due course of time is a
debtor. The debtors are shown as an asset in the balance sheet. For example, Mr.
Arul bought goods on credit from Mr. Babu for Rs.10,000. Mr. Arul is a debtor to
Mr. Babu till he pays the value of the goods.
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A person who gives a benefit without receiving money or money’s worth
immediately but to claim in future, is a creditor. The creditors are shown as a
liability in the balance sheet. In the above example Mr. Babu is a creditor to Mr.
Arul till he receives the value of the goods.
11. Purchases:
Purchases refers to the amount of goods bought by a business for resale or for use
in the production.
Goods purchased for cash are called cash purchases.
If it is purchased on credit, it is called as credit purchases.
Total purchases include both cash and credit purchases.
[Link] Return or Returns Outward:
When goods are returned to the suppliers due to defective quality or not as per the
terms of purchase, it is called as purchases return. To find net purchases, purchases
return is deducted from the total purchases.
13. Sales
 Sales refers to the amount of goods sold that are already bought or manufactured
by the business.
When goods are sold for cash, they are cash sales but if goods are sold and
payment is not received at the time of sale, it is credit sales.
Total sales includes both cash and credit sales.
[Link] Return or Returns Inward:
When goods are returned from the customers due to defective quality or not as per
the terms of sale, it is called sales return or returns inward. To find out net sales,
sales return is deducted from total sales.
15. Stock or Inventory:
Stock includes goods unsold on a particular date. Stock may be opening and
closing stock.
The term opening stock means goods unsold in the beginning of the accounting
period.
Whereas the term closing stock includes goods unsold at the end of the accounting
period.
For example, if 4,000 units purchased @ Rs. 20 per unit remain unsold, the closing
stock is Rs.80,000.
This will be opening stock of the subsequent year.
16. Revenue:
Revenue means the amount receivable or realised from sale of goods and earnings
from interest, dividend, commission, etc.
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It is the amount spent in order to produce and sell the goods and services. For
example, purchase of raw materials, payment of salaries, wages, etc.
18. Income:
Income is the difference between revenue and expense.
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It 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. It may be in the
form of cash receipt, invoice, cash memo, bank pay-in-slip etc. Voucher is necessary
to audit the accounts.
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Invoice is a business document which is prepared when one sell goods to another.
The statement is prepared by the seller of goods. It contains the information
relating to name and address of the seller and the buyer, the date of sale and the
clear description of goods with quantity and price.
21. Receipt:
 Receipt is an acknowledgement for cash received. It is issued to the party paying
cash. Receipts form the basis for entries in cash.
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It is stated that ‘an account is a summary of relevant transactions at one place
relating to a particular head’.
Each transaction’s debit and credit aspect have an account. All transactions
relating to a particular account will be recorded in that particular account.
Therefore, at the end of an accounting period all transactions relating to an
account will be reflected as a summary in the concerned account.
DEBIT AND CREDIT RULE
Each transaction has a debit and credit entry in specific accounts. All transactions
related to a particular account are recorded in that account. So, at the end of the
accounting period, all transactions for that account will be summarized within it.
According to American approach all accounts will be categorised in to five
categories.
Assets, Liabilities, Income, Expenses and Capital.
This Classification is known as modern approach. The debit and credit rules,
formulated under the double entry system of accounting are based on this
approach.
The following are the rules of Debit and Credit under this approach

Asset - Nature - Debit

Asset Increase Debit
Asset Decrease Credit
Liability – Nature - Credit
Liability Increase Credit
Liability Decrease Debit
Expenses – Nature - Debit
Expenses Increase Debit
Expenses Decrease Credit
Income – Nature - Credit
Income Increase Credit
Income Decrease Debit
Capital – Nature - Credit
Capital Increase Credit
Capital Decrease Debit