Basic Terms in Accounting
1.1 Transactions
Exchange of goods and services between two persons or parties for money or money's worth is
known as Transactions.
(a) Monetary Transactions:
The transaction which involves an exchange of money or money’s worth directly or indirectly is called
monetary transactions. Only monetary transactions are recorded in the books of accounts.
1) Cash Transactions: A business transaction in which cash is paid or received immediately is known
as cash transaction.
(a) Purchase of goods for cash at Rs.15,000/-
(b) Payment of salary at Rs.5,000/-
2) Credit Transactions: A credit transaction is one in which cash is not paid or received immediately
at the time of a transaction but it is paid or received at a later date.
(a) Goods sold on credit to Mr. Aman at Rs.8,000/-
Aman A/c ……Dr. 8000
To Sales
(Being goods sold to aman on credit)
(b) Sold machinery to Mr. Amar singh on credit at Rs.20,000/-
(b) Non-Monetary Transactions:
The transaction which does not involve an exchange of money or money’s worth directly or indirectly
are called Non-monetary transactions. An exchange of one thing against another thing is called as
Barter transactions.
1) Entry:
Recording of a business transaction in the proper form or method in the books of accounts is called
an entry.
2) Narration:
A brief explanation of the business transaction for which an entry is passed is called as a narration.
It is always given in a bracket below the journal entry and it usually starts with the word "Being"
or "For".
3) Goods:
The term ‘goods’ refers to merchandise, commodities, articles or things in which a trader trade.
These are purchased or manufactured for the purpose of sale and to earn profit.
(a) Medicines are goods for the chemist.
(b) Vegetables are goods for the vegetable vendor.
(c) Parts like tyres, engine gearbox, cables are produced by a vehicle manufacturer like Bajaj
Auto, Hero Motors.
1.2 Capital and Drawings:
a) Capital:
The total amount invested into the business by the owner is called capital. Excess of assets over the
liabilities is also called as capital. The equation for this is:
Capital = Assets – Liabilities
Capital is a liability of the business as this amount is payable by the business enterprise to the owner
at the time of closure of the business.
b) Drawings:
The amount of cash or value of goods, assets, etc., withdrawn from the business by the owner for
personal use called as drawings.
E.g. : A proprietor pays colleges fees of his son, or pays for his medical expenses, mobile
bills etc, from the business.
1.3 Debtors and Creditors:
a) Debtor (Dr.): (Sales )
A person who has to pay to the business for getting goods and services on credit is known as
debtor. A debtor is a person who owes money to the business.
b) Creditor (Cr.) : (Purchases)
A person to whom business has to pay for getting goods or services on credit is known as creditor.
A creditor is a person to whom business owes money.
c) Bad Debts: (Nominal)
An irrecoverable amount from a debtor is known as "Bad Debts". It is a revenue loss to the
business.
1.4 Expenditure and Types of Expenditure
Expenditure:
An amount spent by the business for any consideration received by business is called expenditure.
(a) Capital Expenditure:
This expenditure is incurred to acquire fixed asset or to increase the value of fixed asset. It gives the
benefit for a long period of time and it is non-recurring in nature.
E.g.: Purchase of Machinery, extension of building, purchase of computer etc.
(b) Revenue Expenditure:
Revenue expenditure is an expenditure from which no future benefit is expected but having
immediate or short-term benefit may be less than one year. It does not increase profit earning capacity
of an organization. These are normal day to day operating expenses of a business organization and
appear on the debit side of Trading A/c or Profit and Loss A/c.
E.g.: Rent paid, Salary paid, Wages paid etc.
(c) Deferred Revenue Expenditure:
An expenditure which is basically revenue in nature but benefit of which is not exhausted within one
year is called as Deferred Revenue Expenditure. Such expenditure is written off over number of years.
Such written off amount is shown on debit side of profit and loss a/c and unwritten amount is shown
on asset side of the Balance Sheet.
E.g.: Heavy expenditure on advertising, heavy legal expenses.
1.5 Cash Discount and Trade Discount:
Discount is a concession or allowance given by the seller to purchaser.
There are two types of discounts.
a) Trade Discount:
It is an allowance given on selling Price, catalogue price or list price of goods. This discount is allowed
at the time of purchase/sale of goods. Value of goods purchased/sold recorded is net value payable
i.e after deduction of amount of trade discount allowed. If goods of ` 1000/- are sold at 5% trade
discount, the value of goods that will be recorded will be ` 950/- both by the purchaser and the seller
and not ` 1000/-. Hence, trade discount does not appear in the books of accounts (entries)
separately.
b) Cash Discount:
It is the amount deducted from the final amount due at the time of receipt. It is the concession given
for encouraging prompt payment. It is given either for the spot payment or for payment within a
specific period. Cash discount is calculated after deducting trade discount, since it is loss to the seller
and gain to the buyer, cash discount appears in the books of accounts.
1.6 Solvent and Insolvent:
i) Solvent:
If a person’s assets are more than his liabilities, or equal to his liabilities, he is called as a solvent
person. Solvent person is financially sound and is in a position to pay off all his debts.
E.g.: A person’s total assets have been calculated to Rs.50,00,000/- and his total debts were
Rs.30,00,000/- since his position is sound, he is able to pay off his debts therefore he is called
Solvent.
ii) Insolvent:
A person whose liabilities are more than his assets is an insolvent person. Such person’s liabilities are
more than his assets.
E.g.: A person’s total assets or property have been calculated to Rs.20,00,000/- and his total debts
were Rs.50,00,000/- and if he is not in a position to get any amount from any sources and if the court
is so satisfied then he will be declared as an insolvent person.
1.8 Goodwill:
Goodwill may be described as the aggregate of those intangible attributes of a business which
contributes to its superior earning capacity over a normal return on investment. It may arise from such
attributes as favourable locations, the ability and skill of its employees and management, quality of its
products and services, customer satisfaction etc.
❖ Goodwill is the reputation of business expressed in terms of money.
❖ Goodwill is an intangible asset
1.9 Profit or Loss
1) Profit:
When the selling price of goods is more than the cost price it is a profit. Profit increases the
capital of the business. e.g. If goods are sold for Rs.50,000/- and all expenses during the period
amounted to Rs.30,000/- then the profit is Rs.20,000/-
2) Loss:
When cost price of goods is more than its selling price it is a loss. Loss decreases the capital of
business e.g If goods are sold for Rs.50,000/- and all expenses during the period amounted to
Rs.60,000/, then the loss will be Rs.10,000/-
3) Income:
It is revenue arising as a result of business transactions. It is the amount receivable or realised
from services provided and earnings from interest, dividend, commission, etc.
4) Revenue:
It is income that a business has from its normal business activities usually from the sale of goods
and services to customer.
1.10 Assets, Liabilities, Net Worth:
i) Assets:
Any physical thing or right owned that has a monetary value is called as an asset. The ownership of
the Asset must be with business unit. E.g Land, Goodwill, Patents, Computers etc.
Types of Assets:
a) Fixed Assets/Non-current Assets :
The assets which give long term benefit to the business are known as fixed assets e.g Land and
Building, Plant & Machinery, Goodwill etc. These assets may be tangible or intangible.
b) Current Assets:
Assets which are held in the business for the operating year and can be converted into cash very easily
are called as current assets. e.g Debtors, Bills Receivable Cash in Hand, Cash at Bank, Stock etc.
c) Fictitious Assets :
These assets are not represented by tangible possession or property. They are imaginary assets but
do not have any realisable value. e.g Deferred revenue expense like advertisement paid for 4 years.
iii) Liabilities:
Amount payable by the business to others is known as liability. It is a debt or amount due from the
business to others for the benefit received by the business unit. e.g Loan taken, Creditors, Bank
Overdraft, Outstanding Expenses etc.
Types of Liabilities:
a) Fixed Liabilities : One of the major source of funds in the business is fixed liabilities. It may be in the
form of capital, secured loans, long term loans from banks and from financial institutions etc.
b) Current Liabilities: Short term liabilities payable within a year are called current liabilities. Current
liabilities arise in the regular current operations of the business. These liabilities are not normally
secured. E.g. Creditors, Bills Payable etc.
iv) Net worth or Owners Equity or Capital:
The amount or funds provided by the proprietor in the business is called as “Capital” as well as the
excess of assets over liabilities of the business is also known as “Capital” or “Net Worth”. Net worth
includes Capital and Reserves. Capital can be in the form of cash or in kind.
Check Your Knowledge
1) Every debit has corresponding __________.
a) Debit
b) Credit
c) Right hand side
d) None of these
2) Radha`s Account is a type of __________account.
a) Nominal
b) Personal
c) Real
d) Expenses
3) Machinery Account is __________account.
a) Nominal
b) Income
c) Personal
d) Real
4) Goodwill is __________asset.
a) Tangible
b) Current
c) an intangible
d) None of these
5) Prepaid expenses is __________account.
a) Real
b) Personal
c) Nominal
d) Income
6) Debit the receiver, Credit the __________
a) Goes out
b) Giver
c) Income and gains
d) Comes in
7) Debit what comes in, Credit what __________
a) Giver
b) Expenses and losses
c) Goes out
d) Income and gains
8) Debit all _________and Credit all income and gains.
a) Giver
b) Expenses and losses
c) Goes out
d) None of these
9) Amount which is not recoverable from customer is known as ______________.
a) Bad Debts
b) Debts
c) Debtors
d) Doubtful debts
10) Accounts must be honestly prepared and they must disclose all material information is
known as _________.
a) Entity Concepts
b) Dual Aspect Concept
c) Disclosure Concept
d) Cost Concept
11) A commodity in which a trader deals is known as _______________.
a) Goods
b) Income
c) Property
d) Expenditure
12) _________ means a reputation of a business valued in terms of money.
a) Trademark
b) Assets
c) Patents
d) Goodwill
13) The immediate recognition of loss is supported by principle of __________.
a) Conservatism
b) Objective
c) Matching
d) Consistency
14) Brief explanation of an entry is called as _________.
a) Folio
b) Narration
c) Posting
d) Journalising
15) An act of exchange of things or services between the two parties is termed as______.
a) Ledger
b) Transfer
c) Transaction
d) Business
