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Basic accounting terms
In order to understand the subject matter clearly, one must grasp the following common expressions always used in business accounting. You may note that these terms can be applied to any business activity with the same connotation. The understanding of the subject becomes easy when one has the knowledge of these important terms of accounting.
Transactions
Transactions are those activities of a business, which involve transfer of money or goods or services between two persons or two accounts. For example, purchase of goods, sale of goods, borrowing from bank, lending of money, salaries paid, rent paid, commission received and dividend received. Transactions are of two types, namely, cash and credit transactions.
Cash Transaction is one where cash receipt or payment is involved in the transaction. For example, When Mr. X buys goods from Mr. Y paying the price of goods by cash immediately, it is a cash transaction.
Credit Transaction is one where cash is not involved immediately but will be paid or received later. In the above example, if Mr. X, does not pay cash immediately but promises to pay later, it is credit transaction.
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. At times, what may be classified as ‘goods’ to one business firm may not be ‘goods’ to the other firm. e.g. for a machine manufacturing company, the machines are ‘goods’ as they are frequently made and sold. But for the buying firm, it is not ‘goods’ as the intention is to use it as a long term resource and not sell it. Services are intangible in nature which is rendered with or without the object of earning profits.
Proprietor
A person who owns a business is called its proprietor. He contributes capital to the business with the intention of earning profit.
Capital
It is the amount invested by the proprietor/s in the business. This amount is increased by the amount of profits earned and the amount of additional capital introduced. It is decreased by the amount of losses incurred and the amounts withdrawn. For example, if Mr. X starts business with Rs.5,00,000, his capital would be Rs.5,00,000.
Assets
Assets are the properties of every description belonging to the business. An asset is anything you own in your business. They are the things in your office, your laptops and desktops, scanners, hard drives, your vehicles, your receivables owed by customers and your cash on hand. Everything you own is considered an asset of the business. Assets are used to generate revenue and purchase other assets. For example, when you buy a new computer, you use one asset (cash) in exchange for another asset (computer equipment). Cash in hand, plant and machinery, furniture and fittings, bank balance, debtors, bills receivable, stock of goods, investments, Goodwill are examples for assets. Assets can be classified into tangible and intangible.
Tangible Assets: These assets are those having physical existence. It can be seen and touched. For example, plant & machinery, cash, etc.
Intangible Assets: Intangible assets are those assets having no physical existence but their possession gives rise to some rights and benefits to the owner. It cannot be seen and touched. Goodwill, patents, trademarks are some of the examples.
Assets can also be classified into Current Assets and Non-Current Assets.
Current Assets – An asset shall be classified as Current when it satisfies any of the following :
(a) It is expected to be realised in, or is intended for sale or consumption in the Company’s normal Operating Cycle,
(b) It is held primarily for the purpose of being traded ,
(c) It is due to be realised within 12 months after the Reporting Date, or
(d) It is Cash or Cash Equivalent unless it is restricted from being exchanged or used to settle a Liability for at least 12 months after the Reporting Date.
Non-Current Assets – All other Assets shall be classified as Non-Current Assets. e.g. Machinery held for long term etc.
Liabilities
Liabilities refer to the financial obligations of a business. These denote the amounts which a business owes to others, e.g., loans from banks or other persons, creditors for goods supplied, bills payable, outstanding expenses, bank overdraft, sales taxes received from sales but not yet paid to the state, etc. Liabilities represent claims against your assets.
Depending upon the period of holding, these obligations could be further classified into Long Term on non-current liabilities and Short Term or current liabilities.
Current Liabilities – Liability shall be classified as Current if it satisfies any of the following :
(a) It is expected to be settled in the Company’s normal Operating Cycle,
(b) It is held primarily for the purpose of being traded,
(c) It is due to be settled within 12 months after the Reporting Date, or
(d) The Company does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting date (Terms of a Liability that could, at the option of the counterparty, result in its settlement by the issue of Equity Instruments do not affect its classification)
Non-Current Liabilities – All other Liabilities shall be classified as Non-Current Liabilities. E.g. Loan taken for 5 years, Debentures issued etc.
Internal Liability : These represent proprietor’s equity, i.e. all those amount which are entitled to the proprietor, e.g., Capital, Reserves, Undistributed Profits, etc.
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