Basic Terms or Concept of Accounting.
Assets: Assets are things of value used by the business in its operation. This are economic resources of an enterprise that can be usefully expressed in monitoring terms.
Assets are future economic benefits, the rights which are owned or controlled by an organization or individual.
Classification of Assets:
1) Fixed Assets: It refers to those assets which are held for the purposes of providing all or producing goods or services and those that are not held for resale in the normal course of business.
a) Tangible Fixes Assets: It refers to those fixed assets which can be seen and touched but we can experience their existence.
Example: Land and Building, Plant and Machinery, and Furniture.
a) Intangible Fixes Assets: It refers to those fixed assets which cannot be seen and touch.
Example: Good Will, Trademarks, Copyrights.
2) Current Assets: Current assets are those asset which are held in the form of cash, for their conversion into cash, for their consumption in the production of goods or rendering the services in the course of business.
3) Fictitious Assets: These are assets not represented by tangible possession or property. Examples of preliminary expenses, discount on
issue of shares, debit balance in the profit and loss
account when shown on the assets side in the balance sheet
Liabilities: Liabilities means the amount which the form owts to outsiders. This are the obligations or debts, that the enterprise must pay in money or services at sometimes in the future.
According to Fimmy & Miller liabilities are depth, they are amounts owed to creditors.
Thus, the claims of those who are not owners are called liabilities.
This can be expressed as Liabilities = Assets - Capital
Classification of Liabilities:
1) Current Liabilities or Short Term Liabilities:
Current Liabilities: Referred to those liabilities which fall due for payment in a relatively shorter period( normally a period of not more than 12 month ) for the date of the balance sheet.
Example: Bills Payable, Trade Creditors, Bank Overdraft, etc.
2) Long Term Liabilities: Referred to those liabilities which do not fall due for payment in a relatively short period( normally a period of more than 12 months from the date of balance sheet )
Example: Long Term Loan, Debentures
3) Capital: Capital is the investment made by the owners for use in the ferm. For the business, capital is the lability towards the owner equity or proprietorship or the net worth owner equity means owners claim against the assets. This can be expressed as Capital = Assets - Liabilities
4) Drawings: Amounts or goods which drawn by the proprietor from the business for his/her private or personal use is termed as. The cost of using business assets for private or domestic use is also called drawings. Use of business car of domestic purpose or use of business premises for residential purpose is also called drawings.
5) Revenue: Revenues are the amount a business earns by selling its products or rendering services to the customers,
6) Expenses: Expenses are the costs incurred by a business in a process of earning revenue.
7) Income: Income is the difference between revenue and expenses.
8) Loses: Loses are unwanted burden which the business is forced to bear. Loss of goods due to theft or fire, or flood, storm, or accidence is terms as loss in accounting.
Losses are different from expenses in the sense that expenses are voluntarily incurred to generate income where losses are forced to bear.
9) Purchases: Are the total amount of goods procured by business on credit and for cash for the manufacture or for resell.
Purchase Returns or Return Outwards: Purchase return is the part of purchases of goods, which is returned to the seller. This return maybe due to unnecessary; excessive and detective supply of goods. In order to calculate net purchases, purchase return is detected from purchases. Purchase returns are also known as return outwards because it is the return of goods, to the supplier.
10) Sales: Sales are total revenues of goods sold or services provided to customer. Any good sold for cash or for credit is called sales. But it does not include sale of any asset.
Sales Returns: Sales return is that part of sales of goods which is actually return to us by the purchases or customers. This return may be due to excessive, unnecessary and detective f goods, or violation of terms of agreement. Sales return also known as return inwards, it is detected from sales in order to calculate net sales.
11) Stock or Inventory: Stock or inventory this measure of something on hand goods, spared and other items in a business.
12) Debtors or Accounts receivables: Debtors are persons or others entities that owe to an enterprise an amount for receiving goods and services on credit.
13) Creditors or Account Payable: Creditors are persons or other entities that have to be paid by an enterprise goods and services on credit.
14) Solvent: Solvent are those persons and firms who are capable of meeting their capabilities out of their own resources. Solvent firms have sufficient funds and assets to meet proprietors and creditors claim. Solvency shows the financial soundness of the business.
15) Insolvent: Insolvent are all those business firms who have been suffering loses for the last many years and are not even capable of meeting their liabilities out of their assets and are financially unsound. Only the court can declare the business firms as insolvent it is satisfied that the continuation of the firm will be against the interest of the public or the creditors. No firm can declare itself as insolvent.
16) Transactions: Transactions are those activities of a business which involve transfer of money, or goods or services between two persons or two accounts.
Example: Purchase of goods, sale of goods, borrowing from banks lending of money, salaries paid, rent paid, commission received, etc.
Transactions are of two types:
1) Cash Transaction
2) Credit Transaction
1) Cash Transaction: Is the one where cash receipt and payment is involved in the transaction.
Example: When John buys goods from Smith and pays the price of goods by cash immediately it is cash transaction.
2) Credit Transaction: Is the one where cash is not involved immediately, but will be paid or received later.
Example: John doesn't pay cash immediately but promise to pay later at a future date it is credit transaction.
17) Entry: The entry refers to the recording of business transaction in the book of account. Every entry should be recorded in terms of money.
18) Posting: Transaction recorded in general book in the form of entry one further transferred to individuals ledger account is called posting.
19) Ledger: All accounts are kept together in the book is called ledger book, the size of ledgers is depending upon the volume of transactions in the business.
20) Costing or Balancing of ledger: At the end of the accounting year or at expected period the ledger is total with the both the side is called costing or totalling of ledger. The difference in either side is written as balance carried forward.
21) Accounting period of Financial year: Basically the financial year includes 12 months, starting from Jan to Dec or April-March as per the nature of business. Business man closes his books of account at the end of the every financial year.
22) Trial Balance: Trial balance is a statement of account having debit and credit balance, it is a base for preparation of financial statement, but is not a part of final account.
23) Vouchers: Accounting transaction must be supported by documents. This documentary proofs in support of the transactions are termed as vouchers. It may be a receipt, cash memo, invoice, wages bill, salaries bill, deeds or any document as an evidence of transaction having taken place.
24) Invoice: Invoice is a business document which is prepared when are sell goods to another. The statement is prepared by the sell of goods. It contains the information related to name and address of the seller and the buyer, the date of sell and clear description of goods with quantity and price.
25) Receipt: Is an acknowledgement of cash received. It is issued to the party which pays the cash. Receipt from the bases for entries, in cash book.
26) Account: Account is a a summary of relevant transaction at one place, relating to assets, expenses, or revenue, named in the heading. An account is a brief history of financial transaction of a particular person or item. An account has too sides called debit side, and credit side.
