ACCOUNTING TERMS

1. Business Transaction : Business Transaction means a financial transaction or event

entered into by two parties for transfer or exchange of goods or services and is
recorded in the books of accounts. Its chief characteristics are :
1.
2.
3.
4.
5.

It is concerned with money or moneys worth of goods & services

It arises out of the transfer or exchange of goods or services.
It brings about a change in the financial position ( ie assets & liabilities)
It impacts the accounting equation
It has a dual aspect Debit and Credit

It is to be noted that Internal transaction is only an accounting transaction (eg

Depreciation) and it is the External transaction which is a business transaction. Secondly, a
Business transaction may be on Cash terms ie a Cash transaction or on Credit terms ie a
Credit transaction.
2. Account : Account is a summarised record of transactions relating to a particular head
at one place. It records not only the amount of transactions but also their effect and
direction.
3. Capital : Capital is the amount invested by the proprietor or partner in the business. It
may be in the form of money or assets having a monetary value. It increases with
Profits earned and fresh capital introduced in business and decreases with Withdrawls
or Drawings and Losses incurred.
It is also called Owners Equity or Net Worth. It can be calculated with the
following equation : Capital = Assets Liabilities.
4. Drawings : Amounts withdrawn or goods taken (valued at CP) by the proprietor or
partner for personal use. It reduces Capital by that much amount.
5. Liability : Money owed or payable by business is a liability. Money owed to outside
parties is an external liability and money owed to owners is internal liability (which is
also called Capital) of business.
Liabilities may be classified as Current and Non-current.
Current liabilities are short term and payable within 12 months from end of
accounting period. Examples Creditors, Bills payable, short term loans etc.
Non-current liabilities are payable after a period more than 12 months. Examples
Long term loans, Debentures etc.
6. Asset : An Asset is a valuable property or legal rights owned by a business. This
means that Asset is anything which will enable the business to get cash or economic
benefit in future. Examples Land, Building, machinery, Stock, Debtors, Cash &
Bank balances.
Assets may be classified as

(1) Non-current Assets;

(2) Current Assets and
(3) Fictitious Assets.
Non-current Assets These are assets which are held by the business as an
investment for facilitating business operations and not from the point of view of resale.
Hence they are long term. Examples
1. Fixed Assets FA may be Tangible (land, building ,machinery) or Intangible
(Goodwill, Trademark etc)
2. Long-term Loans & Advances
3. Non-current Investments
4. Other Non-current Assets
Current Assets These are Assets which are held by the business with the purpose of converting them
into cash within a short period of one year. Examples Goods, Debtors, Bills payable
etc.
Pre-paid expenses are Current Assets. even though they cannot be converted into cash.
As the benefit of these expenses will be available next accounting year, they are
classified as Current Assets in the present year.
Fictitious Assets They are neither Tangible Assets nor Intangible Assets. They are
losses which are not written off in the year they are incurred but are written off in more
than one accounting period.
Examples
(1) Deferred Revenue Expenditure in case of firms Large advertising expenditure
that will give benefit for more than one accounting period.
(2) Discount on Issue of shares and Loss on issue of Debentures in case of a
Companies.
7. Receipts : It is the amount received or receivable for selling assets, goods or service.
Receipt may be a Revenue Receipt or a Capital Receipt.
Revenue Receipt: It is the amount received or receivable in normal course of
business. Example Amount received or receivable for sale of goods or services. It is
recurring in nature and recorded on credit side of Trading and P&L A/C.
Capital Receipt: It is the amount received or receivable which is not revenue in
nature. Example Amount received or receivable for sale of Assets. It is non-recurring
in nature and recorded on credit side of respective Asset A/C.
8. Expenditure : It is the amount spent or liability incurred for acquiring assets, goods
or services.

Expenditure may be a Capital Expenditure, Revenue Expenditure or a Deferred

Revenue Expenditure.
Capital Expenditure : It is the amount spent or liability incurred to acquire assets or
improving existing assets which will increase earning capacity of business. It is thus of
an enduring nature. It may be incurred to acquire tangible asset like Plant& Machinery,
land, bulding etc. or it may be incurred to acquire intangible asset like Goodwill,
patent etc.
Capital Expenditure is shown on the Asset side of B/S.
Revenue Expenditure : It is the amount spent on items, the benefit of which will last
only in the current accounting period. All Expenses incurred to run the business like
cost of goods sold, salaries, rent etc are Revenue Expenditures ( or Expenses) and are
shown on the debit side of P&L A/C.
Deferred Revenue Expenditure: It is the amount spent on Revenue items, but the
benefit of which will not get extinguished in the current year. Since its likely to
benefit several years, it is charged appropriately in the following years as well.
Example Large advertising expenditure that will give benefit for more than one
accounting period is debited to P&L A/C of current year, as well as, following years
that are likely to benefit from this expenditure.
9. Expense : Expenses are costs incurred to generate revenue in an accounting period.
Examples :
1.
2.
3.
4.
5.

Payment of Salaries, wages, Rent etc.

Cost of goods sold.
Writing off a part of Fixed Asset depreciation.
Amount written off from Current Asset Bad Debts.
Decline in value of Assets decline in Investments.

All Expenses are shown on the Debit side of P&L A/C.

10. Prepaid Expenses and Outstanding Expenses :

Prepaid Expense is an expense which has been paid in advance and the benefit of the
same will be available in the following year. As such, it will be accounted for as an

Expense in the following years P&L and is shown as an Asset in the current years
B/.S. Example Prepaid Insurance or Prepaid Rent.
Outstanding Expense is an expense which pertains to current year but has not yet
been paid till end of accounting period. Since it pertains to current year, it is charged to
current years P&L A/C and since it has not yet been paid it is shown as a liability in
the current years B/S.
11. Revenue and Income :
Revenue is inflow of money/cash through sale of goods & services and use of other
resources of business in the course of accounting year. Examples sale of goods, rent,
commission etc.
Income is profit earned during a period.
Income = Revenue Expense
12. Gross Profit and Net profit
Gross Profit is the difference between Revenue from Sales over Direct costs.
Gross Profit = Revenue Direct Costs
Net Profit is the difference between Revenue from Sales over Direct and Indirect
costs. It equals Gross profit less all Indirect Expenses as well.
13. Gain and Loss
Gain is a profit of irregular or non-recurring nature. It arises from transactions which
are incidental to business, Example Profit from sale of Fixed Assets.
Loss has three connotations:
(1) Same as Gross Loss and Net Loss ie Loss on account of regular business
transactions emerging due to excess of expenses over revenue.
(2) Money or moneys worth lost against which business receives no benefit; Like
theft of goods
(3) Arising on account of events of irregular or non-recurring nature, Example Loss
from sale of Fixed Assets.
14. Purchases and Purchases Return
Purchases refer to goods or articles purchased for resale or for producing finished
goods which are also meant to be sold. Purchases for cash are Cash purchases and
purchases on credit are Credit purchases.

Purchases Return : Purchased goods may be returned to the seller for any reason, say,
they are not as per specifications or they are defective. Such goods returned are called
Purchases Return or Returns Outward.
15. Sales and Sales Return
Sales refer to sale of goods that are dealt with by the business. . Sales for cash are
Cash sales and purchases on credit are Credit sales.
Sales Return : Sold goods may be returned by the purchaser for any reason, say, they
are not as per specifications or they are defective. Such goods returned are called Sales
Return or Returns Inwards.
16. Stock (Inventory)
Stock or Inventory is a tangible asset held by an enterprise for the purpose of sale in
normal course of business or for the purpose of using it in the production of goods
meant for sale.
Opening Stock is the stock-in-hand held at the beginning of an accounting period and
Closing Stock is the stock-in-hand held at the end of an accounting period.
Stock can be at Raw Material stage or Work in progress stage or Finished Goods
stage.
Stock is classified as a Current Asset in the B/S. Stock is valued on the basis of Cost
or Net realisable value (Market value) whichever is lower.
17. Trade Receivables = Debtors + Bills Receivable
Debtors are persons who owe monies to enterprise for goods or services sold to them
on credit.
Bills Receivable is a Bill of exchange accepted by a Debtor the amount of which will
be received on a specified date.
18. Trade Payables = Creditors + Bills Payable
Creditors are persons whom the enterprise owes monies for goods or services
purchased from them on credit.
Bills Payable is a Bill of exchange accepted, the amount of which will be payable on a
specified date.