basic terms of accounting

7/27/2019 Basic Terms of Accounting

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Basic Terms of Accounting

Santosh Parashar

Associate Professor- Accounting & Finance

IAMR, Ghaziabad


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Capital

Amount invested by the proprietors or Owners Financial Holding

Value of Net Assets i.e. (Assets-Liabilities)

Capital may be owned capital or borrowed capital


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Assets

They are economic resources/properties owned or possessed bya business.

They are acquired by a business that help in earning the revenue.


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Types of Assets Fixed Assets

Current Assets

Liquid Assets

Fictitious Assets

Tangible Assets

Intangible Assets

Wasting assets

Contingent Assets


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Fixed Assets

Assets held permanently by a business.

Assets Which have long life.

Help in earning the future expected profits.

Examples-Plants, Machinery, Land, Building, Furniture, Fittings, Fixtures,

Vehicles, Loose tools etc.


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Current Assets

Assets which can be converted into cashwith in a short period usually a year.

They are generally meant for resale.

They get changed their form very often.

Examples-Cash, Stock of goods,

Bill receivables, Sundry debtors


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Liquid Assets

Assets which are either in the form of cash

or can be convertible into cash quickly.

Examples-

Cash/Bank Balance/Marketable Securities etc.


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Fictitious Assets

Assets which are virtually not the assets .

They are either expenses incurred at the time of commencement

of business or capital losses in the past which are capitalized.

Examples- Debit Balance of P/L-a/c,Preliminary Expenses,

Discount on issue of shares,

Underwriting Commission etc.


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Tangible Assets

Assets which have a physical presence.

Assets which can be seen and touched.

Examples- Cash, Stock of goods, Furniture, Building, Vehicle


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Intangible Assets

Assets which can not be seenand touched.

Assets which do not have aphysical presence but posses

some value.

Examples- Goodwill, Copy rights, TradeMarks, Service Marks, Patent rights etc.


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Wasting Assets

Assets which getexhausted in the courseof time.

Examples-

Natural resourcesextracted from Earth,Sea, Quarries, mines, andpetroleum oil wells etc.


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Contingent Assets

Assets whose existence/value is dependent on the happening or

non-happening of a certain event which is not definite.

Future agreements made presently to supply technology which may

or may not become a reality. If the technology is supplied to thebusiness it becomes assets.


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Goodwill

The value of this intangible asset fluctuates over a period of timedue to changing conditions & Circumstances.

Ex. Popular trade marks, Patents, Exceptionally good contracts,Standard quality, reasonable price, unparallel service, dedicatedlabor force, Honest management of high integrity, soundfinancial position, monopoly power/govt. patronage etc.

GOV .


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Copy rights

A right which does not let the others copy of matter of originalbooks/CDs/ new research etc.


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Trade Mark

This is a mark , graphics, shape of goods and theirpackaging or combination of colors etc. whichdistinguish the goods or services and also give the

legal protection to the same.


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Liabilities

Amounts owed by the business to the owners/outsiders.They are the obligation/responsibilities of a business to pay themoney to outsiders.

Long term Liabilities Which are repayable after a long

period of time. Bank loans/Debentures

redeemable after 5 to 7years/capital introduced by theowners.

Which are repayable within a year

Generally the position of currentassets is strengthened whenever theC.L. are created. Thus to pay the C.L.,the C.A. are reduced.

Sundry creditors/Bills payable/BankOverdraft/Outstanding expenses,incomes received in advance etc.

Short term/Current Liabilities


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Contingent Liability

Possible future liability which may result of decision of

court / sudden failure of operating machinery/ loss or

damage of property or manpower etc.


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Outstanding Expenses

Expenses that have already been incurred but not paid inthat period.

Ex.- O/s Salary/O/s Wages


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Advance incomes

Incomes received in advance but services shall be rendered in future.

Advances from customers, rent received from tenant etc.


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Depreciation

Depreciation refers to two very different butrelated concepts:

a) decline in value of assets, and

b) allocation of the cost of tangibleassetsThis is a non-cash expense that reduces thevalue of an asset as a result of wear andtear, age, or obsolescence etc.


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Transaction Analysis

Business transaction means-Dealing between parties

Business activity

Exchange of goods for servicesReceipt & payment of money


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Kinds of Transactions

On the basis of nature-Cash transaction (when receipt of cash is not postponed but

immediately transferred )

Credit transaction (when receipt of cash is postponed for future )

On the basis of Scope-

Internal- any transaction which is concerned with the activity

within the enterprise (like- charging of Depreciation)

External- A transaction between business and outside parties.


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Exchange Transactions-

Goods or services are exchanged but consideration is given to their value.

Goods of 500 are exchanged for furniture of 500.
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Transfer Transactions-

Transfer of some amount from one account to another.


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Hidden Transactions-

If goods sold for 1000 in credit and amount of 990

received in full settlement. Thus, 10 will be treated as discount

and will be entered the same.
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Discount

Allowance allowed by the trader to his customer from saleable

goods or from receivable amount of cash.

or


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Trade Discount or Functional Discount

Deduction in price given by the wholesaler/manufacturer to

the retailer at the list price or catalogue price.


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Cash Discount

A reduction in the price of an item for sale allowed if

payment is made within a stipulated period.


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Drawings

Assets withdrawn from the business by the owners for their personal use.

These assets are usually cash but can be any other asset withdrawn.


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Entry

Means recording of transactions in the books of accounts.


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Creditors & Debtors

A creditor is a party (e.g. person, organization, company, or

government) that has a claim to the services of a second party. It is a

person or institution to whom money is owed.

The first party, in general, has provided some property or service to the

second party under the assumption (usually enforced by contract) thatthe second party will return an equivalent property or service.

The second party is frequently called a debtor or borrower. The first

party is the creditor, which is the lender of property, service or money.


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Objective

Revenue/ Income

These are the amounts that the business earns by selling

its products or providing services to customers.

Other items of revenue common to many businesses are

commission, interest, dividends, royalties, rent received

etc.


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Articles or items purchased for salespurpose at profit or processing by the

business or for use in the manufacturing

process as raw material are known as

goods.

In other words, goods are commodities in whichthe business deals, for e.g., tables, chairs, desks

etc are goods for a firm dealing in furniture.

Americans use the term merchandise for

goods.

Goods


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Expenses:

These are the costs incurred by a business in the process of earningrevenues. Generally, expenses are the cost of assets consumed or service

used during an accounting period. Expenses become assets or cost.

Some examples of expenses are -wages, salary, rent, interest,

depreciation, telephone charges etc.


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Objective

Purchases

These are the total amount of goods procured by a business on credit orfor cash for use or for resale.

In a trading concern goods are purchased for resale with or without

processing whereas in a manufacturing concern, raw materials are

purchased, processed further into finished goods, and then sold.


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Purchase return & Sales returns

A purchase return occurs when abuyer returns merchandise that it

has purchased from a supplier.

A Sales return occurs when a

seller accepts merchandise that it

has sold to a customer.


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Objective

Bad and Doubtful Debts

A bad debt is an amount owed to abusiness or individual that is written

off by the creditor as a loss because

the debt cannot be collected and all

reasonable efforts to collect it have

been exhausted.

Doubtful debts are those debts which a business orindividual is unlikely to be able to collect. The

reasons for potential non-payment can include

disputes over supply, delivery, the condition of item

or the appearance of financial stress within a

customer's operations.

basic terms of accounting

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