Basic Accounting Terms

Basic Accounting Terms

(1) Business Transaction:A business transaction is an economic activity of the business that changes its financial position.Whenever any business transaction takes place,it results in the value of some of the assets,liabilities or capital.

(2) Event:An event is the consequence or result of transaction.

(3) Account:An account is a record of all business transactions relating to a particular person or item.In accounting we keep a separate record of each individual,asset,liability,expense or income.The place where such a record is mantained is termed as an account.In actual practice,the individual transactions of like nature are recorded,added and subtracted at one place.

(4) Capital:It refers to the amount invested by the proprietor in a business enterprise.Amount may be in the form of cash,goods or assets.It is the amount with the help of which goods and assets are purchased in the business.As such,in order to calculate the amount of capital all current assets and fixed assets are added up and external liabilities are deducted out of it.

(5) Drawings:Any cash or value of goods withdrawn by the owner for personal use or any private payments made out of business funds are called drawings.

(6) Liability:It refers to the amount which the firm owes to outsiders (except the amount owed to proprietor).In the words of Finney and Miller,"Liabilities are debts,they are amount owed to creditors." This can be expressed as:Liabilities=Assets-Capital

(7)  Assets:Anything which is in the possesion or is the property of a business enterprise including the amounts due to it from others,is called an asset.In other words,anything which will enable a business enterprise to get cash or a benifit in future is an asset.Thus,cash and bank balances,stock,furniture,machinery,land and building,bills receivable,money owing by debtors etc. are all assets.

(8) Capital Reciepts and Revenue Reciepts:It is also necessary to make a proper distinction between capital reciepts and revenue reciepts because the revenue receipts are shown on the credit side of Trading and Profit & Loss Account whereas the capital receipt are shown in the balance sheet either as increase in liabilities or as reduction in the value of the assets.

(9) Expenditure:Any disbursement of cash or transfer of property or incurring a liability for the purpose of acquiring assets,goods or services is called expenditure.As such,the amount spent on the purchase or erection of Building,Plant,Furniture etc. is capital expenditure.Such expenditure yields benifit over a long period and hence written in Assets.

(10) Expenses:Expense is the cost incurred in producing and selling the goods and services.According to Finney and Miller,"Expense is the cost of use of things or services for the purpose of generating revenue".

(11) Income:'Income is different from 'revenue'.Amount received from sale of goods is called Revenue' and the cost of goods sold is called Expense.Surplus of revenue over expenses is called 'Income'.It can be expressed as:

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-Sujal Juneja 
Juneja Technology

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