1. Business
Any legal action that is done in order to earn income or profit is called business. It includes the production of goods and services, purchase and sale of goods and services, banking, insurance, education transportation, and any other trading activity etc.
2. Business Transaction
Business transactions refer to activities and events that affect the financial position of a business and are capable of being assigned monetary values. Business transactions are recorded in the books of the business and summarized in financial reports.
A business transaction must have the following characteristics:
- It must be for a sum certain in money (i.e., of a financial value)
- It must be supported by a source document (e.g. sales invoice, official receipt, disbursement voucher, remittance advice, etc.)
- It must have a two-fold effect in the elements of accounting
A business transaction can either be an exchange transaction (involves physical exchange of values such as sale, purchase, payment, etc.) or a non-exchange transaction (does not involve physical exchange (e.g. loss from flood, fire loss, internal production, depreciation, etc.)
Examples of Business Transactions
- Investment of cash or other assets by the owners
- Withdrawal of cash or other assets by the owners, and distribution of dividends
- Borrowing of cash from other entities for business use
- Payment of borrowings
- Sale of goods or services (either for cash or on credit/account)
- Collection of receivables from customers and other entities
- Acquisition of assets or services (either for cash or on credit/account)
- Payment of payables to suppliers or other entities
3. Financial Year
A financial year is a period of 12 months for which a business prepares its books of accounts. In simple words the financial year starts from 1st April and ends on 31st March. For example, 1st April 2020 to 31st March 2021.
4. Trade
Purchase and sale of goods and services in order to earn profit is called trade.
5. Profession
Any work done in order to earn profit which necessarily requires prior training and education is called a profession. For example Doctors, Lawyers, Engineers, Chartered Accountant etc.
6. Proprietor
The person who invests capital in the business and entitled to have all profits and losses of the business is called proprietor or owner of the business. The nature of proprietor depends upon the type or nature of the business organization. In a sole trade business, sole trader is a proprietor, in a partnership firm, partners or proprietor and in company shareholders are proprietors.
7. Capital
The amount of cash, goods or assets which is initially invested by proprietor while commencing business is called capital. It is invested to earn profits. In other words, the excess of assets over liability is capital.
8. Assets
Anything which can provide future economic benefit which can be converted into cash or cash equivalent are called assets. All the resources of business having economic value. These resources help the business to earn a profit and have future value. These are important for running a business and are in the possession of businessman. These are of two types: –
a. Fixed assets
The assets which are used by business for a long time are called fixed assets or non-current assets. These are continued to be used by the business for a period of more than one year. For example: – Land, building, plant, machinery, furniture, vehicle etc.
b. Current assets
The assets which are used up in one year or easily get converted into cash in one year are called current assets. For example: – Raw material, finished goods, debtors, cash balance and bank balance etc.
9. Liabilities
They are the obligation or debt that are to be paid in future. The amount which business owes to others is called its liabilities. There is a certain amount which business is under obligation to pay. There are two types of liabilities: –
a. Long-term liabilities
Those liabilities which are usually payable after a period of 1 year. Long-term loans from Financial Institutions, debentures issued by companies etc.
b. Short-term liabilities
These are those which are payable within one year. For example creditors, bank overdrafts etc.
10. Drawings
The amount of cash or goods which is withdrawn by proprietor from business for its private uses is called drawings. It reduces the capital of the business.
11. Goods
The things which are bought and sold by business are called goods. It is a physical item of trade in which an enterprise deal. Goods maybe raw material, work in progress of finished goods. In accounting, when goods are purchased it is written as purchases. When goods are sold it is written as sales. It is written as a stock if remain unsold at the end of the year.
12. Purchases
Goods bought for resale are called purchases. This may be in form of raw material or finished goods. Purchase of assets is not called purchases because assets are not purchased for resale.
13. Sales
When purchase goods are sold in order to earn a profit are called sales. When goods are sold for cash it is called cash sales and goods sold on credit are called credit sales.
14. Purchase return
Goods once purchased by the business, are returned back due to any reason is called purchase return or return outwards.
15. Sales return
Goods once sold to the customer when are returned back by them due to any reason then such goods are called as sales returns or return inwards.
16. Stock
These are those goods which are left unsold in the business at the end of the year. The goods unsold at the end of the accounting year are called closing stock. The same stock is called opening stock at the beginning of a new accounting year.
17. Revenue
These are the amount received by a business for selling goods or services. This amount is received from day to day business activity in the form of rent, interest, commission, discount, dividend etc. In other words, we can say that the amount received by selling of goods and providing services to customers is called revenue. It is also known as Income.
18. Expenses
The cost which business incurs for producing goods and services or for using services is called expenses. These include payments made for wages, salaries, freight, advertisement, rent, insurance etc. In other words, we can say that the amount spent in the process of earning revenue is an expense.
Expenditure vs Expense It’s important to understand the difference between an expenditure an expense. Though they seem similar, they’re actually different and have some important nuances you must know about. Expenditure – This is the total purchase price of a good or service. For example, a company buys a 10 lacks piece of equipment that it estimates to have a useful life of 5 years. This would be classified as a 10 lacks capital expenditure. Expense – This is the amount that is recorded as an offset to revenues or income on a company’s income statement. For example, the same 10 lacks piece of equipment with a 5-year life has a depreciation expense of 2 lacks each year. |
19. Expenditure
The amount which is paid for increasing profit earning capacity of business is called expenditure. It is of long period nature.
20. Income
That amount which increases the capital of the business is called income. The excess of revenue over expenses is also called income.
21. Loss
When expenses incurred are more than revenue then this excess of expenses is called loss. This reduces the capital of the business.
22. Cost
Total of direct or indirect expenses which are incurred for the production of goods and services is called cost. Like the cost of raw material, cost of labor and cost of other services used to make the article is called its total cost.
23. Discount
Concession a rebate allowed by a businessman 2 its customer is called a discount. It may be of two types: –
When cash discount is allowed customer is required to pay the less due amount, so it encourages the customer to pay as early as possible.
a. Trade discount
When a trader allows a concession to its customers on the list price, it is known as trade discount. It is not recorded in the books. Its motive to increase sales. It is stated in the invoice.
b. Cash discount
When a trader allows a concession to the customer to make payment in cash or by cheque, it is known as cash discount. It is recorded in the books. Its motive to get payment earlier.
24. Debtor
The person, firm or an organization who takes goods or services on credit from the business are called debtors of the business. In other words, the person, firm or an organization who owes money or Money’s worth to the business is called debtor. The amount received to debtor is an assets of the business.
25. Creditors
The person, firm or an organization from whom goods or services are purchased on credit by the business are called creditors of the business. The business owes money to them. The amount payable to creditors is a liability of the business.
26. Receivables
The total amount which is to be received in business is called receivables.
27. Payables
The total amount which is to be paid by the business is called payables.
28. Entry
Recording of the transaction in account books is called making an entry or the record of a transaction in books is called an entry.
29. Turnover
The total amount of cash and credit sales during a particular period is called turnover.
30. Insolvent
A person is said to be insolvent when he or she is incapable to meet all his or her liabilities. Such a person has more liability than assets.
31. Bad debts
The amount which could not be recovered from debtors due to his insolvency or disability to pay is called bad debts.
32. Vouchers
A voucher is an internal document within a company that is issued by the accountants payable (AP) department. It can be seen as a “memorandum” of the liabilities of the company, and it is used to authorize a payment.
In each company there exists an accounts payable department that is in charge of making payments that are due to its creditors and suppliers.
A voucher is a backup document needed to initiate the procedure of collecting and filing all other documents required to settle a liability.
An important feature of the internal accounting of a company is the control mechanism. The mechanism ensure that each payment made by the company is previously authorized and that it is appropriate for the goods or services received based on the preexisting agreements.
In other words, the written document through which financial transactions are recorded in the books is called voucher. A voucher is a supporting document for an invoice received by the company. Once the voucher is issued, it means that the invoice’s been checked, and it’s been confirmed that it needs to be paid. The voucher authorizes the payment of the invoice in one lump-sum that will be written on the balance sheet.
33 Account
Account is a brief history of financial transaction, particular person or item. A list of all transactions relating to a person, property, income expenses is called into account. It is a tabular statement containing all the transaction of same nature at one place under a common heading in a systematic manner.
34. Debit and credit
Every account has two sides. Left side is called the debit side and the right side is called the credit side. In short, it is Dr. and Cr.
35. Commission
In a business activity, a remuneration is paid to the agent for his services, is called commission.
36. Intangible Assets
Intangible assets are those assets which have no physical presence such as goodwill, trademark, copyright, patents of a company.
37. Depreciation
Depreciation is the decline in the value of business assets such as plant and machinery over time due to use or obsolescence.
Normally, there are three methods of depreciation that are followed in India
- Straight line method
- Diminishing value method
- Unit of production method
38. Memorandum Book
To maintain the records of company in proper way, accountant needs lots of books. One of them is memorandum book or waste book. Memorandum or waste book is that note book which is used to write the transactions when it happened before writing all these transactions in journal. It is needed where there are thousands of transactions are done within one day on the sale point. This book is very helpful to record in journal. Its other name is rough book, long book and rough copy book.
Apparently, we can say that there is no need of waste or memorandum book in double entry system. But informally, to keep it is very important because to remember the large number of transactions is impossible and if we record it in journal, it is very difficult to correct repeatedly. So, accountant can record all transaction on rough pages book and then record it in journal through memorandum book.
39. Book Keeping
Book keeping is the activities concerned with the systematic recording and classification of financial data of an organization in an orderly manner. It is essentially a record-keeping function done to assist in the process of accounting. It is a key component in forming the financial statements of the organization at the end of the financial year.
Bookkeeping also concerns itself with the classification of financial transactions and events. Such classification of transactions is essential to maintain proper financial accounts. It also involves preparing source documents for the financial transactions and other business operations being carried out.
There are many methods of book-keeping. The most common ones are the double-entry system and the single-entry system. But even methods other than these, which involves the process of recording financial transactions in any manner are acceptable book-keeping systems or processes.
Objectives of Bookkeeping
The main objective of book-keeping is to keep a complete and accurate record of all the financial transactions in a systematic orderly, logical manner. This ensures that the financial effects of these transactions are reflected in the books of accounts.
Then the second main objective is to ascertain the overall effect of all recorded transactions on the final statement of the company. Book-keeping will eventually ascertain the final accounts of the company, namely the Profit and Loss Account and the Balance Sheet.
Need for Bookkeeping
One of the main reasons for book keeping is so records can be maintained to show the financial position of each and every head/account of income and expenditure. Through book-keeping, detailed information about each expense or income could be obtained instantaneously.
Activities of Bookkeeping
Book-keeping comprises of a lot of functions and activities bundled together. Some such activities are
- Recording all financial transactions
- Verifying and recording invoices received from suppliers
- Posting debit and credits in the respective ledgers
- Producing and organizing all source documents such as invoices
- Payroll accounting and upkeep may also be clubbed in with book-keeping
- Billing for goods sold or services provided to clients
- Monitoring individual accounts receivable
- Recording depreciation and other adjusting entries
- Providing financial reports
Today bookkeeping is done with the use of computer software. For example: Tally, QuickBooks etc.
40. Double-Entry System
The double-entry system of accounting or book keeping means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.
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