The document defines key accounting terms and concepts. It discusses the definition of business, types of businesses and business organizations. It also defines transactions, bookkeeping, accounting, proprietor, capital, drawings, goods, purchases, sales, returns, allowances, discounts, assets, liabilities, expenses, income, accounting systems, parties interested in accounting information, accounting concepts, conventions and the accounting equation.

1. TERMS AND CONCEPTS
DEFINE BUSINESS
Any legal activity which is doing for the purpose of earning profit is called business.
TYPE OF BUSINESS
 Manufacturing
 Trading
 Servicing
TYPE OF BUSINESS ORGANIZATION
 Trading
 Partnership
 Joint stock company
DEFINE TRANSACTION
Any dealing between two or more person which can change the financial position of the business is called
transaction.
Type of transactions
 Cash Transaction
 Credit Transaction
DEFINE BOOK KEEPING.
Recording of business transactions in books of account in prescribed manner
DEFINE ACCOUNTING.
Accounting is an art of recording, clarifying, summarizing and interpreting the results from financial statements
DEFINE PROPRIETOR.
He is the owner of the business. He gives time and invests money into the business
DEFINE CAPITAL.
The amount of cash or the value of goods or both invested by the owner in establishing his business is known as
capital.
or
Owner contribution in business assets is called capital
DEFINE THE TERM DRAWING.
Withdrawal of cash or goods from the business for private and personal use of the owner is called drawing.
WHAT IS GOODS (MERCHANDISE)?
Anything which is purchased for resale purpose are called goods e.g. cloths are goods for cloth merchant
DEFINE PURCHASES.
Goods purchased are called purchases, purchases are of two type
 Cash Purchases
 Credit Purchases
DEFINE CASH PURCHASES.
Goods purchased for cash are called cash purchases
DEFINE CREDIT PURCHASES.
Goods purchases on credit are called credit purchases.
DEFINE PURCHASES RETURN / RETURN OUTWARD / RETURN TO SUPPLIER.
If goods purchased are returned to the supplier, it is called purchases return. The good are returned when they are:
 Defective
 Not according to sample
 Damaged
 Excess of the quantity ordered for
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2. TERMS AND CONCEPTS
DEFINE PURCHASES ALLOWANCE.
If the purchaser informs the supplier that some goods are defective and the supplier reduce some amount. This
reduction in price is known purchase allowance.
WHAT IS SALES ALLOWANCE?
If the customer informs the seller that some goods are defective and seller reduced some amount this reduction in
prices is known as sales allowance.
WHAT IS SALES?
Goods sold are called sales. Sales are of two kinds;
 Cash sales
 Credit sales
WHAT IS CASH SALES?
Goods sold for cash are called cash sales
WHAT IS CREDIT SALES?
Goods sold on credit are called credit sales.
WHAT IS SALES RETURN (RETURN INWARD)?
If the customer returns the goods it is called sales return goods returned when they are
 Defective
 Not according to sample
 Damaged
 Excess of the quantity ordered for
WHAT IS STOCK (INVENTORY)?
Unsold goods are called stock / inventory
DEFINE VOUCHER
Written evidence in support of business transaction e.g
 Cash memo
 Invoice
 Cash receipt voucher
 Cash payment voucher
DEFINE CASH MEMO.
Written evidence in support of cash transaction
WHAT IS INVOICE?
Written evidence in support of a credit transaction
WHAT IS DEBTORS (ACCOUNT RECEIVABLE)?
Debtors (account receivable) are those persons from whom the amount is receivable for goods sold on credit.
WHAT IS CREDITORS (ACCOUNTS PAYABLE)?
Creditors (account payable) are those persons to whom the amount is payable for goods purchased on credit.
WHAT IS DISCOUNT?
Reduction in the price of non-defective goods
 Trade discount
 Cash discount
o Discount allowed / Sale Discount
o Discount received / Purchases Discount
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3. TERMS AND CONCEPTS
WHAT IS ALLOWANCE?
Reduction in the price of defective goods
 Purchases allowance
 Sales allowance
WHAT IS TRADE DISCOUNT?
It is deduction allowed by a trader on the lit price of the goods. It is not recorded in books of account
WHAT IS CASH DISCOUNT?
Deduction allowed by a creditor to his debtor for making prompt payment is called cash discount
Types of cash discount
 Discount allowed
 Discount received
WHAT IS ASSETS?
Valuable things posses by the business are called asset e.g. building, machinery, furniture etc
DEFINE LIABILITIES
Outsider contribution in business assets are called liabilities
or
These are the amounts payable by the business e.g. bank loans and creditor
DEFINE EXPENSES
Expense is an expired portion of acquisition price.
or
Cost of goods and services used up in the process of generating income.
 Rent paid
 Salaries paid
 Wages paid
 Interest paid
DEFINE EXPENDITURE
The cost of acquiring the assets are called expenditure
DEFINE INCOME (REVENUE)
It is the price of goods sold or services rendered by the business e.g.
 Rent received
 Interest received
 Commission received
 Sales
WHAT IS CASH TRANSACTIONS?
If the value of transaction is met in cash immediately it is called cash transaction.
WHAT IS Credit Transactions?
If the value of transaction is not met in cash immediately it is called credit transaction.
WHAT IS COMMISSION?
It is remuneration for services rendered by one person to another person
WHAT IS DOUBLE ENTRY SYSTEM?
A system in which two fold aspect (Dr & Cr) of transaction are recorded
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4. TERMS AND CONCEPTS
DEFINE EQUITY
Claim against business assets.
Equity is of two types
Owner equity / capital (owner contribution in business assets)
Outsider equity / liabilities (outsider contribution in business assets)
WHAT IS DRAWINGS?
Cash or Goods withdrawn by the owner from the business for personal use is called drawings
HOW MANY TYPES OF ACCOUNTING?
 Financial accounting
 Management accounting
 Cost accounting
WHAT IS FINANCIAL ACCOUNTING?
It is an accounting which is used to calculate the profit or loss and observe the financial position of the business
WHAT IS COST ACCOUNTING?
It is an accounting which is used to calculate cost of product
WHAT IS MANAGEMENT ACCOUNTING?
It is an accounting which is used for the decision making
WHAT IS CASH SYSTEM OF ACCOUNTING?
It is a system in which accounting entries are made only when cash received or paid
WHAT IS ACCRUAL SYSTEM OF ACCOUNTING?
It is a system in which accounting entries are made when transaction carried, whether on cash or on credit
DEFINE CASH SYSTEM OF ACCOUNTING
It is a system in which accounting entries are made when cash is received or paid
PARTIES INTERESTED IN ACCOUNTING INFORMATION?
 Creditors
 Debtors
 Owners
 Teachers
 Students
 Government
 Employees
WHAT IS SINGLE ENTRY SYSTEM?
A system in which only one effect of transaction is recorded or two effect of transaction is recorded or sometime no
effect of transaction is recorded
DEFINE DOUBLE ENTRY SYSTEM?
A system in which two fold aspect ( Dr & Cr) of each transaction is recorded.
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5. TERMS AND CONCEPTS
DEFINE ACCRUAL SYSTEM OF ACCOUNTING
It is a system in which accounting entries are made on the basis of amount having become due for payment or
receipt.
WHAT IS FUNDAMENTAL ACCOUNTING EQUATION?
ASSETS = LIABILITIES + CAPITAL
WHAT IS MEANT BY THE TERM CONCEPT IN ACCOUNTING?
Accounting concept means the basic assumptions upon which accounting is based
DEFINE BUSINESS ENTITY CONCEPT.
According to this concept business is treated as separate person from its owner
DEFINE GOING CONCERN CONCEPT.
According to this concept business will continue for a long period of time
DEFINE MONEY MEASUREMENT CONCEPT.
According to this concept we record only those transactions which can be measured in term of money
DEFINE COST CONCEPT
According to this concept an asset is recorded in the books at the price at which it was acquired
DEFINE DUAL CONCEPT
According to this concept every transaction have two effect (one is Dr & other is Cr)
DEFINE ACCOUNTING PERIOD
According to this concept life of a business is divided into small segment (1 Year) and each small segment is called
accounting period e.g. 1ST JANUARY 2005 -------------------------- 31ST DECEMBER 2005
DEFINE MATCHING CONCEPT
The concept of offsetting expenses against revenue is called matching concept
or
According to this concept expense are match with income, we should consider only those expenses which are
incurred to generate income of that period
Net profit (Year2005) = Income (Year 2005) Vs Expenses (Year 2005)
DEFINE REALIZATIONS CONCEPT
Revenue should be recognized at the time when goods are sold or services are rendered.
DEFINE THE TERM CONVENTION.
It means those customs or traditions which guide the accountant in maintaining the accounting record.
DEFINE CONVERSION OF DISCLOSURE.
It means important information relating to transaction must be disclosed.
DEFINE THE CONVENTION OF MATERIALITY.
It means we should record only those events which are significant and insignificant events should be ignored.
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6. TERMS AND CONCEPTS
DEFINE CONVENTION OF CONSISTENCY.
It means that accounting practice should remain unchanged from one period to another.
DEFINE CONVENTION OF CONSERVATISM.
It means that uncertain and risk inherit in business transaction should be given a proper consideration.
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