Following are some of the basic
accounting terms and their
Transaction is a financial event that takes place in the course of business or for furtherance of business. It involves transfer of money or goods and services and is recorded in the books of accounts. For e.g. purchase of goods, sale of goods, cash deposit in bank, salary payment, etc.
Voucher is a document which serves as an evidence or support to a transaction. For e.g. in case of credit purchase, purchase invoice or in case of cash purchase, cash memo. The vouchers act as source documents on the basis of which transactions are recorded in the books of accounts.
Entry is a recording made in the books of accounts in respect of a transaction that has taken place. Entries are passed in the books of accounts on the basis of vouchers.
Capital is the amount that is invested in the business by the owners. It also includes the assets that are brought into the business by the owners. In case of sole proprietorship, the owner is the sole proprietor himself. In case of partnership, the owners are the partners. In case of company, the owners are the shareholders. Profits (retained) are added to the capital and losses are deducted from the capital.
Drawings are the total amount of cash or goods or any other assets that are withdrawn by the owner of business for his personal use. Drawings amount is deducted from the capital. Drawings are possible only in sole proprietorship and partnership form of business. There are restrictions on drawings in the company.
Asset is an item of economic value owned by a company with the expectation that it will provide future benefit to the company. There are two main types of assets:-
(1) Fixed asset:-
Fixed assets are the assets which are held by the company for a long period of time i.e. more than one accounting year. There are two types of fixed assets:-
(a) Tangible fixed assets:- Tangible fixed assets are the assets which can be physically verified i.e. seen and touched for e.g. land, building, machinery, furniture, etc.
(b) Intangible fixed assets:- Intangible fixed assets are the assets which cannot be physically verified i.e. seen and touched for e.g goodwill, patent, copyright, trademark, etc.
(2) Current asset:-
Current assets are the assets which are held by the company for a short period of time i.e. less than one accounting year. Some of the important examples of current assets are stock, trade debtors, sundry debtors, cash in hand, bank balance, prepaid expenses, loans and advances given by the company on short-term basis,etc.
Liability is the amount of money that the company owes to the outside parties. There are two main types of liabilities:-
(1) Long-term liabilities:-
Long-term liabilities are the liabilities that are due for re-payment after one accounting year. Some of the important examples of long-term liabilities are debentures, bonds, term loans from banks and financial institutions, fixed deposits issued by the company, etc.
(2) Current liabilities:-
Current liabilities are the liabilities that are due for re-payment within one accounting year. Some of the important examples of current liabilities are trade creditors, sundry creditors, outstanding expenses, loans and advances received by the company on short-term basis,etc.
Purchases are the amount of goods bought by the company for resale or for use in the production of goods or rendering of services in the normal course of business. Purchases may be cash purchases or credit
Total purchases = cash purchases + credit purchases
Sales are the amount of goods sold that are bought or manufactured by the company or services rendered by the company. Sales may be cash sales or credit sales.
Total sales = cash sales + credit sales
When the goods are returned to the suppliers because of some defect or if the goods are not as per the specifications, it is called as purchase return. Purchase return is also called as return outward. Purchase returns are deducted from the amount of total purchases.
When the goods are returned by the customers because of some defect or if the goods are not as per their specifications, it is called as sales return. Sales return is also called as return inward. Sales returns are deducted from the amount of total sales.
Retained earnings is the portion of net profit of the company which is not paid out as dividend to the shareholders but retained by the company to reinvest in the business or to pay debt or to purchase some asset. Retained earnings is shown under the capital in the balance sheet. It is the sum of all the profits retained by the company since its inception.