Business transactions involve the exchange of value, such as goods or services for money, between two or more entities. There are two main types of transactions: cash transactions involving an exchange of cash, and credit transactions where payment is promised at a future date. Capital refers to the value invested in a business by its owner, while drawings refer to amounts withdrawn by the owner. Assets are items owned by a business that have value, and liabilities are amounts owed to outside parties. Revenue is the income generated from sales or services, while expenses are costs incurred to generate that revenue.

1. BASIC ACCOUNTING
TERMS
By: Prof. Bhavik R. Shah
[M.Com ; M.Ed]
98 98 46 21 48

2. BUSINESS TRANSACTIONS













Business Transactions means exchange
Of value for value (In Goods or Services against money)
Measured in terms of money
Relevant to the business
Between to or more persons or firms
For an event to be a business transaction
Must possess the quality of economic substance
Related to business and
Affect the economic result and
Must be capable of being measured in monetary terms
There are mainly TWO types of transactions
Cash transactions, which includes exchange of cash &
Credit transactions, in which the payment of cash is promised
to some future date.

3. CAPITAL
Business and its owner are separate persons
 The value of cash, goods or assets brought in the
business by the owner is known as capital.
 Capital shows the investment made by the owner.
 Capital means excess of business assets over
liabilities.
 Capital = Total Assets – Total liabilities (External)
 Net Assets = Total Assets – Total liabilities (External)
 Net Worth = Total Assets – Total liabilities (External)
Note: In capital transaction, Owner is given of value to
the business.


4. DRAWINGS

Business and its owner are separate persons

The value of cash, goods or assets withdrawn by the
owner of the business is known as drawings.
Drawings shows the decrease [reduction] in capital.

Note: In Drawings Transactions, Owner is
Receiver of value From the business.

5. LIABILITIES


Any amount payable by the business
To any outsider (other then owner) is known as
liability.
How Created?



By purchasing goods on credit, the amount becomes
payable or liability is created.
Liability is created by borrowing funds.
Liability is created by borrowing services.
There are TWO types of Liabilities:


Current liability [Amount payable within 1 Year ]
Long-term liability [Amount payable after 1 year]

6. ASSETS
Assets are




Items
Having realizable value
Used by the business for its operations and
Owned by the business
Examples:
Cash, land, Building, Machinery, Stock of goods,
Furniture, Goodwill, Patent, Copyright, trademark,
Etc. are included in assets.

7. Assets are classified into THREE types:
 Fixed Assets:
Land, Building, Machinery, Furniture, Goodwill, Patent,
Copyright, Trademark etc. which can be used for a long
period are known as fixed assets.

Current Assets:
Stock of goods, cash balance, Bank Balance, tools etc keep on
changing with the transactions of the business, hence, they
are known as current assets.

Fictitious Assets:
Certain expenses, the benefit of which is available for more
then one year, are not written off in one year but are known
as fictitious assets.
Preliminary expenses, discount on debentures,
advertisement campaign expenses, etc. are examples of
fictitious assets.

8. Other classification of Assets is:


Tangible assets
land, Building, Machinery, Furniture, etc. which can
be seen, touched, are known as tangible assets.
Intangible assets
Assets like goodwill, patent, copyright, trademark
are valuable but cannot be seen or touched,
therefore, they are known as intangible assets.

9. REVENUE

Revenue is the amount that business earns

By selling its products.
By providing services to customers.


Revenues are the titled as

Sales Revenue
Fees
Commission
Interest
Dividends
Royalties Received
Rent Received







Revenue is recognized

When the goods or services are sold to the customer for cash
* In credit sales also, though the amount is yet to be received revenue is
recognized.
For interest, Discount, Royalties, Rent, Commission Etc.
* When they are due or accrued.


10. EXPENDITURE



Expenditure is the amount of
Resources Consumed
For any benefit or services
Resources are consumed
Amount spent or paid or
When the liability is created
Examples:
Machinery Purchased
Salary Paid
Wages Paid
Furniture Purchased

11. EXPENSES




These are the cost incurred by a business in the
process of earning revenues.
Generally expenses are measured by
• The cost of assets consumed OR
• The cost of goods consumed
• Services used
• During the accounting period
Examples:
Depreciation, Rent paid, Wages, Salary, Interest, Cost
of Heat, Light, Telephone Etc.
If the benefit of Expenses is available to the business
for more than one year is known as prepaid
expenses.

12. INCOME


Income is the increase in the net worth of the organization
either from business activity or other activities.
Income is a comprehensive term, which includes profit also.

Profit occurs:
 On sale of Goods and Services
 On sale of Business Assets

Income is classified into
Revenue Income:

Income received from the day to day transaction of the business is known
as revenue income.

Capital Income:
The income received on sale of any assets or on receipt of any long-term
debt is known as capital income.

In accounting, income is the positive change in the wealth of
the firm over a period of time.

13. 
LOSS:
LOSS & GAIN
 Amount lost without getting any benefit is known as loss.
For Example: Loss due to fire is a loss.
 Excess of revenue expenses over revenue income is known
as loss.
 Results in decrease in owner’s capital or net assets or net
worth over a period of 1 year is known as loss.

GAIN:
 Gain or Profit is the excess of revenues over expenses
during an accounting year.
 Results in increase in Owner’s capital or net assets or net
worth over a period of 1 year is known as Gain Or Profit.

14. PURCHASES

The items, in which the trader is trading are
called goods.

Goods received by the trader for cash or on
credit are known as purchases.

In a trading concern, purchases are made for
resale with or without processing.

In a manufacturing concern, Raw materials
are purchased, processed further into
finished goods and then sold.

15. SALES:

Goods given by the trader for cash or on credit to the
customer are known as sales.
STOCK:

Goods;
•
•
•
•

Remaining unsold
On hand
At the end of the accounting period
Is known as STOCK OF GOODS
Stock is,
•
•
•
•
Cost of Goods Purchased LESS
Cost of Sold out of the Purchases
This stock is known as closing stock
Which becomes opening stock in the next year.

16. DEBTORS:
Are Persons and other entities
 Known as debtors or customers of the business.
 To whom the goods or services are sold on credit
and
 The amount receivable.
RECEIVABLES:
Amount receivable from any person other than the
debtors are known as receivables.
For Examples:
• Pre-paid expenses
• Income due but not received
• Outstanding income are known as receivables.


17. CREDITORS:
Are Persons and other entities
 Known as creditors or suppliers of the business.
 From whom the goods or services are purchased on
credit and
 The amount is payable.
PAYABLE:
Amount payable to any person other than the
creditors are known as payables.
For Examples:
• Outstanding expenses
• Income received in advance are known as
payables.


18. DEBIT:
To debit means recording an amount on the debit
side (Left-hand side) of a ledger account.
The name of account credited should be written in
the column of particulars.
CREDIT:
To credit means recording an amount on the credit
side (Right hand side) of a ledger account.
The name of account debited should be written in
the column of particulars.

19. Methods or Systems of Accounting
There are TWO methods of accounting:
1.
2.
Double Entry Accounting System
As the name suggests, in book-keeping, each
transaction is given 2 (Double) effects (i) Debit Effects & (ii)
Credit Effect. The amount debited is equal to the amount
credited. This method is used in many countries of the
world including India, as it is the scientific method of
accounting.
Deshi Nama Accounting System
This book-keeping system, which was used in the
ancient times is still prevalent. This is similar to, double
entry system but it is structurally different from double
entry system. In this system, one book is Rojmel, which
satisfies the requirement of cash book and journal and the
other book is khatabahi (Ledger). This system is also
known as "Bahi Khata“ system.