BASIC TERMINOLOGIES
In every field of study, some words are used with their specific meanings. These are called terms in accounting, also some terms are used. These terms and their meaning are explained as under
1- Business: It is a general term and includes any activity undertaken to earn profits such as buying and selling goods, rendering services, and manufacturing goods. The business organizations which are engaged in buying and selling goods/merchandise are called merchandising or trading concerns, while those which are engaged in providing any services are called service concerns the business organizations engaged in producing goods are called manufacturing concerns.
2- Proprietor: A person who invests the money or things in the business is called an owner or proprietor. He is the person who invests capital and gives his time and attention to the business. He is entitled to receive the profit and bear the loss of the business.
3- Transactions: Any dealing between two or more persons for goods or services which affects the financial position of a business and also can be measured in terms of money is called a business transaction. It is of two types, i.e., Cash Transactions and Credit Transactions.
4- Voucher: Any written evidence of a business transaction is called a voucher. The voucher may be a cash memo, bill, invoice, etc.
5- Cash Memo: Any written proof or evidence for the goods purchased from a particular seller is called a cash memo. For example, if we purchase a book from the bookseller, he gives a cash memo or bill. The cash memo serves as a voucher for the payment in cash.
6- Invoice: A written evidence/document given by the seller to credit the sale of goods is called an invoice.
7- Account: It is a device that contains a systemic record of increase or decrease in an item during a particular period.
8- Purchases: The cost of merchandise purchased is called purchases. When the price of goods purchased is paid in cash, it is called cash purchases and when it is paid on any future dates, it is called credit purchases.
9- Sales: The amount earned from sales of goods is called sales. If this price is received in cash, it is called cash sales, and when it is to be received on some future dates, it is called credit sales.
10- Revenues: All sorts of income received or accrued are called Revenues. This revenue may be earned from the sale of merchandise or by rendering services for the customer. It is also earned in the shape of commission, interest or discount, etc.
11- Merchandise: The things purchased by a business organization to resell in the same condition are called merchandise or goods.
12- Expenses: To active the objectives of a business, certain payments are expenses of a business. Examples of such expenses are carriage, freight, cartage, salaries, rent, advertisement, etc.
13- Profit: The amount earned by a business organization after deducting the product from the revenues. In simple words, the excess amount over the expenses is called profit.
14- Loss: If the expenses or the cost of the product or goods is higher than the revenue, the difference is called a loss.
15- Trade Discount: Any concession or allowance or rebate given by the seller to the buyer on the listed or scheduled price of goods is called a Trade Discount. Trade Discount is deducted from the price and the net price is recorded in the books of account. Trade discount is usually allowed or granted in the following circumstances: -
a) When selling to a fellow trader
b) When the buyer is an old customer.
c) When sales are made in bulk.
d) As a custom of trade
16- Cash Discount: A discount, which is allowed or received at the time of cash receipt or cash payment before the due date. The cash discount may be of the following two types
a). Discount Received. It is a deduction granted at the time of payment to creditors (Accounts Payable) for purchases. It is treated as income/ profit.
b) Discount Allowed. It is a deduction allowed at the of cash received from the debtors (Accounts Receivable for sales. It is treated as an expense or loss
17- Commission: Remuneration for services performed by one person to another, normally on a percentage basis is called commission.
18- Stock (Inventory): Goods or merchandise on hand at any time is called stock, inventory, or stock in trade. The value of goods at the beginning of the period is called the Opening Inventory and the value of goods that remained unsold at the end of the period is called the ending inventory.
19 - Turn Over: It means the total amount of sales during a particular period. It is also called stock turnover or inventory turnover.
20- Balance: The difference between the total debits and total credits of any account is called Balance. When the debt is more, it is called a debit balance and when the credit is more, it is called a credit balance.
21- Accounts Receivable Debtor: A person to whom goods are sold on credit is called the account receivable of a debtor. It is treated as a current asset and recorded on the Assets side of the Balance Sheet.
22- Account Payable / Creditor: A person from whom goods are purchased on credit is called an Accounts Payable or Creditor. It is treated as a short-term liability for the business and recorded on the liabilities side of the Balance Sheet.
23- Notes Payable: Any instrument in writing payable by the firm on a certain future date is called a note payable or bill payable. These are the bills or notes accepted by the firm.
24- Notes Receivable: Any instrument in writing receivable by the firm on a certain future date is called a note receivable or bill receivable. These are the bills or notes received by the firm.
25- Cash Book: A book of original entries in which all cash receipts and payments are recorded is called a cashbook. It has three types: -
a) Single Column Cash Book
b) Two Column Cash Book
C) Three Column Cash Book.
26- Bad Debts/Un-collectable: The amount, which is finally written off as uncollectible is called Bad Debts. It is treated as a loss of business.
27- Doubtful Debts: The estimated amount of debtors which are expected to become bad debts during the coming period are called Doubtful Debts
28- Reserve for Bad Debts: An amount set aside to cover the future loss on account of doubtful debts is called a Reserve for Bad Debts. It is also called Provision for Bad Debts or Reserve/Provision for Doubtful Debts
29- Outstanding Expenses: It means those expenses, which have been incurred but not paid. These are called Accrued Expenses or Unpaid Expenses.
30- Prepaid Expenses: It Means the expenses, which have been paid in advance but have not yet expired. It is also called Unexpired Expenses or Expenses paid in advance.
31- Unearned Income: Any income, which has been received in advance but not earned in the current year is called unearned income.
32- Accrued Income: The income that is earned during the period but has not yet been received is called Accrued Income.
33- Assets: Anything valuable possessed by a firm with the following three features qualify as assets:
a) The legal title of ownership.
b) Right to use.
c) Right to sale / disposed of.
Examples of assets are cash, building, furniture and fixture, machinery and plant, accounts receivables, notes receivables, investment, inventories, etc. According to the features of their liquidity and the purpose of their holding, the assets can be sub-divided into the following four groups. -
Current Assets: These are either cash or easily convertible into cash. They are acquired or created to convert or sell for cash. The examples of such assets are Cash in hand. Bank Balance, Accounts Receivable, Notes Receivable and Stock, etc.
Non-Current Assets: These are the assets, which are acquired to hold them and earn income other than the business income. Such as investment, and share of other companies. Fixed Deposits, Govt securities. etc.
Fixed or Plant Assets: These assets are acquired to retain and use in business operations e.g., Land, Building, Plant and Machinery, Furniture & fixtures, Motor Vehicles, etc.
Intangible Assets: The assets, which are not physically touchable, but are still valuable for business enterprise e.g., preliminary expenditure, trademark, goodwill, patent rights, etc.
34- EQUITIES: The rights possessed by owners or outsiders against the assets of the firm are called equities. The equities are further divided into two categories
A) Owner's Equity: It is the capital invested by the proprietors/owners of the business, it is the claim of the owners on the business assets it is also called internal equities or capital fund
B) Liabilities: It is the claim of the outsiders against the assets of the enterprise. The liabilities are also called external equities. It may be the following types: -
a) Short-term/Current Liabilities: The liabilities which are payable in near future (within one year) are called short-term or current liabilities examples are accounts payable, notes payable, expenses payable, bank overdraft, etc.
b) Long-Term Liabilities: These are the loans that are raised for the permanent finance of the firm. These are payable after several years examples of long-term liabilities are long-period bank loans, securities and debentures issued, mortgage loans, etc.
34- Drawings: The cash or commodities withdrawn by the owner for his personal use from business are known as drawings.
35- Financial Statements: The statements, which are prepared by the accountants to show the results of the business at the end of a particular period. These are the Income Statement and Balance Sheet.
36- Income Statement: One of the major objectives of accounting is to know the results of the business. This means that profit earned or loss suffered is calculated at the end of the accounting period. For this purpose, a statement is prepared where all the incomes of the period are added and all the expenses of that period are deducted. This statement is called an "Income Statement".
37- Balance Sheet: The balance Sheet represents the financial position of the firm on a certain fixed date, usually at the close of the financial period. All the assets possessed by the firm are written on one side and equities on the other side. Both the assets and the equities are grouped under various classifications. Both sides are equal.
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