16 December 2017

Some Basic Accounting Terms

Some Basic Accounting Terms

One need to grasp the following common expressions always used in business accounting.
Transaction: It means an event or a business activity which involves exchange of money or money's worth between parties.

Goods/Services: These are tangible article or commodity in which a business deals. These articles or commodities are either bought and sold or produced and sold.

Profit: The excess of Revenue Income over expense is called profit. It could be calculated for each transaction or for business as a whole.

Loss: The excess of expense over income is called loss. It could be calculated for each transaction or for business as a whole.

Asset: Asset is a resource owned by the business with the purpose of using it for generating future profits. Assets can be tangible and intangible. Tangible Assets are the Capital assets which have some physical existence. The capital assets which have no physical existence and whose value is limited by the rights and anticipated benefits that possession confers upon the owner are known as intangible Assets. They cannot be seen or felt although they help to generate revenue in future.

Liability: It is an obligation of financial nature to be settled at a future date. It represents amount of money that the business owes to the other parties.

Contingent Liability: It represents a potential obligation that could be created depending on the outcome of an event.

Capital: It is amount invested in the business by its owners. It may be in the form of cash, goods, or any other asset which the proprietor or partners of business invest in the business activity. From business point of view, capital of owners is a liability which is to be settled only in the event of closure or transfer of the business. Hence, it is not classified as a normal liability.

Drawings: It represents an amount of cash, goods or any other assets which the owner withdraws from business for his or her personal use.

Debtor : The sum total or aggregate of the amounts which the customer owe to the business for purchasing goods on credit or services rendered or in respect of other contractual obligations, is known as Sundry Debtors or Trade Debtors, or Trade Payable, or Book-Debts or Debtors.

Creditor: A creditor is a person to whom the business owes money or money's worth. E.g. money payable to supplier of goods or provider of service. Creditors are generally classified as Current Liabilities.

Trade Discount: It is the discount usually allowed by the wholesaler to the retailer computed on the list price or invoice price.

Cash Discount: This is allowed to encourage prompt payment by the debtor. This has to be recorded in the books of accounts. This is calculated after deducting the trade discount.

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