The Indian High School, Dubai

Basic Accounting terms 3. Capital

 Amount invested by proprietor or
1. Business transaction partner
 Financial transactions or events  Money or assets having money
entered into by parties value
 recorded in books of accounts  Liability of business towards
 Can be expressed in terms of money proprietor or partner
 Brings change in the financial  Owner`s equity
position of the firm  Net worth
 Concerned with 2 parties  Equals assets less liabilities
 Examples: (refer text book)
 Dual aspect : 4. Drawings
Receiving (debit)  Amount withdrawn or goods taken
Giving (credit) of the benefit  by the proprietor
 Transaction  for his personal use
 Relationship with Accounting  Goods so taken are valued at
unit purchase cost
 Internal(accounting)  Reduce investment/ capital of the
transaction owners
 External(business)
transaction 5. Liabilities
 Mode of settlement of Value  Amount owed (payable) by the
 cash transaction business
 credit transaction  To outsiders (external) : from credit
2. Account transactions or loans raised.
 Summarized record of transactions Creditors, bank overdraft, bills
 Relating to a particular head payable, ….
 At one place  To the proprietor (internal) :
…it records… represented in the balance sheet as
 Amount capital & free reserves
 Effect Further…
 Direction
…..of transactions
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  Long term liability: payable after a  Fixed Assets : acquired not with the
long period (more than 1 year) ; purpose to resell but to employ
long term loans, debentures,… them in business
 Current liability: payable within a  Facilitates business operations
year ; creditors, bills payable, short  Increases earning capacity
term loans  Land, building,…
 Contingent liability: may or may  Current Assets: retained with the
not arise in future depending on the purpose to convert them into cash
happening of an event ; bills within a short period (one year)
receivable discounted (if  Goods, debtors, bills receivable,…
dishonoured) ; shown as footnote in  Prepaid expenses(though cannot be
balance sheet. converted into cash)…classified as
current assets….as benefit from
6. Assets such expenses are not fully
 Property or legal rights owned by a exhausted …it will be available in
business to which money value can the next accounting year also
be attached  Liquid assets : assets in the form of
 Anything which will enable the firm cash or can be converted into cash
to get cash or a benefit in future within a very short period.
 Land, building, machinery,  Eg: cash, bank, bills receivable,
furniture, stock, debtors, cash, bank debtors,…
balance, ….  Fictitious Assets :
 It can be in tangible or intangible  Neither tangible nor intangible
form  Represents loss or expenses yet to
Classification… be written off
 Tangible : have physical existence;  Eg: Debit balance of P& L A/c (loss),
can be seen & touched. Deferred revenue expenditure…
 Land, building, furniture, goods,…
 Intangible : do not have physical
existence; cannot be seen &
touched.
 Patents, goodwill, trademark,..

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7. Receipts  Does not increase earning capacity
 Amount received or receivable for but maintains it in the current year.
selling assets, goods or services  Shown on the `Debit side` of `P&L
 Capital receipts: amount received A/c`
or receivable for selling assets  Deferred Revenue expenditure :
 Eg: sale of machinery, building,  Revenue expenditure in nature
furniture, etc…  But written off (charged) to P&L A/c
 Revenue receipts : amount received in more than one accounting period
or receivable against sale of goods  Eg: Large advertising expenditure
or services. that will give benefit for more than
 Receipts on account of business one accounting period.
transactions
9. Revenue…
8. Expenditure  Inflow of assets which results in an
 Amount spent or liability incurred increase in owner`s equity
for acquiring assets, goods or  Amount (as a result of operations;
services i.e.; sale of goods or services) added
 Capital expenditure : to capital.
 expenditure incurred to acquire  E.g.; receipts from sale of goods,
assets or improving the existing rent received, commission
assets received,…
 Will increase the earning capacity of  Income = revenue – expense
the business Revenue = sale of goods
 Will give benefit in more than one Expense = cost of sale of goods
accounting year
 Purchase of machinery, furniture,
computers,…to carry on business
 Shown on the `Asset side` of
`Balance sheet`
 Revenue Expenditure :
 amount spent to purchase goods
and services that are consumed
during the accounting period.

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10. Expense 11. Income
 Value expired during the accounting  Profit earned during a period of
period time
…may be..  Difference between revenue &
1. Cash payment…salaries, wages, expense
rent,…  income = Revenue - Expense
2. Writing off a part of fixed assets
(depreciation) 12. Profit
3. Writing off from a current asset  Excess of revenue over cost
(bad debt)  Gross profit : difference between
4. Decline in the value of assets (eg; sales revenue and direct cost
investments)  Net profit : profit made after
5. Cost of goods sold allowing for all expenses …if
 Charged (debited) to P&L A/c expenses are more than the
Prepaid expense revenue…it is Net loss
 Expense paid in advance
 Benefit available in the following 13. Gain
year/years  Profit of irregular or non-recurrent
 Shown under ‘current assets’ in nature
Balance sheet  Example:
 Transferred to P&L A/c in the next Profit on sale of fixed assets or investment
year
Outstanding expense 14. Loss
 Expense that has not been paid for  Excess of expenses of a period over
 Benefit has already been availed its related revenues
 Debited to P&L A/c  Decreases owner`s equity
 Shown under ‘current liabilities’ in  Money/money`s worth lost(or cost
the Balance sheet incurred) against which the firm
receives no benefit
 E.g.; cash or goods lost in theft
 Also from events of non-recurring
nature
 E.g.; loss on sale of fixed assets

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15. Purchases  Stock of goods
 Used for ‘purchases of goods’  Stock of raw materials
 Goods ; articles purchased  Work-in-progress
for resale
for producing finished 18. Debtor
goods which are to be sold  Person who owes amount to
 Includes both cash and credit enterprise on account of credit
purchases of goods (cash purchases sales of goods or services
& credit purchases)  Debt : amount due
 Purchase returns : goods returned
(defective, not as per specification); 19. Bill Receivable
Returns outward  Bill of Exchange
…accepted by a debtor
16. Sales ….the amount of which will be received
 Sale of goods that are dealt with by …..on a specified date
the firm
 Includes both cash & credit 20. Creditor
sales(cash sales & credit sales)  Person to whom an enterprise owes
 Sales return : goods sold when amount on account of credit
returned by the purchaser purchases
(customer); Returns inward
21. Bills payable
17. Stock  Bill of Exchange
 Tangible asset …accepted by the enterprise
 Held by the enterprise ….the amount of which will be payable
 For the purpose of sale/ using it in …..on a specified date
production of goods meant for sale
 Current Asset 22. Goods
 Valued on ‘ cost or market price  Physical items of sale
which ever is lower’ principle  Applies to all items making up the
 Types sales or purchases
 Opening stock  Purchased or manufactured for sale
 Closing stock
Also;
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23. Cost 27. Entry
 Amount of expenditure  Transaction or event
 Incurred on or attributable to  When recorded in the Books of
 A specified article, product or Accounts
activity
28&29. Debit & Credit
24. Voucher  Italian word ‘Debito’ & ‘Credito’
 Evidence of a business transaction  Account - two sides … (refer
Includes…. textbook
 Cash memos
 invoice or bill 30. Proprietor
 Receipt  Person who…
 debit/credit notes  makes the investment
 Bears all the risk
25. Discount
 Reductions allowed to the 31. Receivables
customers in the prices of goods  Outstanding amount due from
 Trade discount…..on the basis of others
sales  Bills receivable
 Sales/purchases will be recorded at  Promissory notes (Note receivable)
net value  Trade debtors
(Sales/purchases – trade discount)
 Cash discount…..for timely payment 32. Payables
of due amount  Amounts due to others
 Expense for party allowing it &  Trade creditors
income for party receiving  Bills payable
Others….  Promissory note payable

26. Books of Accounts

 Journal and Ledger
 in which transactions are recorded

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33. Depreciation 39. Balance sheet
 Fall in the value of an asset  Statement of the financial position
Due to ….  Of an individual or an enterprise
 Usage  As at a given date
 Passage of time
 Obsolescence 40. Entity
 accident  Economic unit which performs
economic activities
34. Cost of goods sold  Business entity (Accounting entity)
 Direct costs of goods or services  Specifically identifiable business
sold enterprise
………Accounting system is devised for a
35. Bad debt specific business entity
 Amount of debt that has become
irrecoverable
 Business loss
 Debited to P&L A/c

36& 37. Insolvent & solvent

 Person or enterprise
 Which is not in a position to pay its
debts
Insolvent
 Which is in a position to pay its debt
Solvent

38. Book value

 Amount at which
….an item appears
……..in the Books of Accounts or Financial
Statements

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