accounting termionlogies principles

1. Ch 1
Accounting
and Its
Terminology
Subject : Accounts
Subject Teacher : Monika Meghapara

2. Meaning & Definition of
Accounting
 Introduction
 Barter System – In this system product was exchanged against
product or product was exchanged against service
 Definition of Accounting –
 “Accounting is an art of recording, classifying and
summarizing in a significant manner and in terms of money,
transactions and events which are in part at least of a
financial character and interpreting the result thereof.”
 “It is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic
entities, that is intended to be useful in making economic
decisions.”

3. Characteristics of Accounting
• I M R C S A C H
 Identification of financial transactions & events
• It involves the identification of those transactions, which are of a financial nature
and relate to the organisation.
 Money as medium of exchange
• Only those business transactions and events, which can be quantified or measured
in monetary terms, are considered.
 Recording
• Recording is the process of entering business transactions of financial character in
the books of original entry. Once the economic events are identified and measured in financial
terms, these are recorded in books of accounts in monetary terms and in a chronological
order.
 Classifying
• It can be defined as the process of grouping transactions or entries of one nature
at one place.

4. Characteristics of Accounting
§ Summarising
§ It involves presenting the classified data in a manner which
is understandable and useful to various users of accounting statements.
§ Analysis and interpretation
§ Analysing and interpreting the financial data helps users to make a
meaningful judgment of the profitability and financial position of the
business. It also helps in planning for the future in a better manner.
§ Communicating to users
§ It involves communicating the financial statements to the various users
i.e., management and other internal and external users.
§ Historical Information
§ In accounting all past transactions and events are recorded. Accounts
prepared on the basis of historical information and result.

5. Advantages of Accounting
 Availability of accounting information
 To know profitability
 To know financial status
 Tax planning
 Valuation of business
 Decision making
 As an evidence
 Comparision with past operations
 Moral Control
 Corrective measures

6. Limitations of Accounting
 Non financial transactions
 Stable value of money
 Historical transactions – events
 Avoidance of market value
 Use of estimates
 Dual Standard

7. Accountin
g as a
Language
of
business
Accounting as a
Language of
business
Accounting a
Science or an art
Qualitative
Characteristics of
Accounting
Information – “R R
U C”
§ Reliability
§ Relevance
§ Understandabilit
y
§ Comparability
Users of Accounting
information and their
needs
§ Management
§ Shareholders
§ Potential
Shareholders
§ Creditors
§ Employees
§ Tax authorities
§ Customers
§ Foreign Entrepreneur
§ Regulatory Bodies
§ Professional Bodies
§ Researchers and
analyst
§ Government etc

8. Accounting terminologies
(1) Business transactions : Business transaction means exchange of
goods or service between two or more persons in the form of cash or on credit.
E.g. (1) Sold goods of rupees 25000 for cash
(2) Purchased goods of rupees 15000 from Patel brothers on credit.
(2) Cash transaction : Receipt or payment of money is made on the spot when
transaction occurs.
e.g. above transaction number 1.
(3) Credit transaction: Receipt or payment of money is made at a future date or
time. e.g. above transaction number 2

9. Accounting terminologies
• (4) Event: Event means a situation or result created from the business
transactions.
• E.g. Sales of goods 25000 is a transaction
• E.g. purchase of goods rupees 15000 is a transaction
• Difference : Profit(25000—15000)= Rs. 10000 (Event)
• (5) Capital: An investment made by owner to commence the business. Or
• Cash, goods or asset brought in business by owner is also known as
capital.
• E.g. Started business by bringing in in cash rupees 10000, furniture rupees
25000.
• (6) Drawings: Cash, goods or asset withdrawn by owner for personal use
from business is known as drawings.
• E.g. (1) Goods of rupees 2,000 withdrawn by owner for personal use.
• (2) Paid Life insurance premium of son rupees 800 from business

10. Accounting terminologies
(7) Liability: Any amount payable by the business for credit purchase of goods or assets or amount payable for
borrowed money is known as a liability.
E.g. (1) purchased goods of rupees 18000 on credit from Raj traders.
E.g. (2) purchased a laptop of rupees 35000 from IBM company for one month credit.
Internal liabilities: The liability of the business towards owner (Capital) is known as internal Liability.
External liabilities: The liabilities of the business towards third party other than owner is known as external
Liability
E.g. Rent rupees 20000 become payable to landlord.
(10) Current liabilities: The liabilities which is to be paid within the duration of one year are known as current
liabilities or short term liabilities.
E.g. amount payable to supplier of goods and service providers
(11) Non current liabilities: The liabilities which is to be paid Within the duration of more than one year is
known as non current liabilities or long term liabilities.
E.g. amount payable for borrowed loan

11. Accounting terminologies
(12) Assets: Asset means any such tangible or intangible product or item which is of ownership of
Business and has economic value.
E.g. land-building, plant-machine, Goodwill, patent , trademark, copyright, stock of goods, cash
balance
(13) Non current asset : The assets which are long term useful without changing its form are known
as non current or fixed assets
E.g. land-building, plant-machines, computer etc.
(14) Current assets: The assets which can be converted into cash within one year is known a current
assets.
E.g. Cash balance, bank balance, stock of goods, debtors, bills receivables etc.
(15) Tangible assets: The assets which can be seen and touch are known as tangible assets.
E.g. land-building, plant-machines, computer etc.
(16) Intangible assets: The assets which cannot be seen or touched are known as intangible assets.
E.g. Goodwill, patent, trademark, copyright, software etc.

12. Accounting
terminologies
Real assets: Real assets means assets that have value in reality,
these assets have market price and it can be converted into
cash.
E.g. Any of the assets which are discussed earlier.
Fictitious Assets: Fictitious assets do not have physical existence.
They do not have any realisable value in the market. Actually
these are huge expenses the benefit of which is going to receive
by the firm for a long time.
E.g. Advertisement campaign expenses.
Receipts (Income) : When money is received due to sales of goods
or service or assets are known as receipts or incomes.
Capital receipts: When money is received due to Sales of any
asset or borrowing loan are known as capital receipts or
income. This receipt is not received regularly
E.g. Sold old furniture for cash Rs. 3000

13. Accounting terminologies
 Revenue receipts: When money is received due to sales of goods or providing other
services is known as revenue receipts. These receipts are regular in nature.
E.g. Income of sales of goods, commission received, rent received, discount
received, interest received, sale of scrap etc.
Payments (Expenses): When money is paid for purchase of goods or service or assets
are known as payments or expenses.
Capital payments: When money is paid for purchase of any assets is known as capital
payments or expenses. This payment is not paid regularly.
E.g. Purchased a computer of Rs. 20000 for business.
Revenue payments: When money is paid for purchase of goods or services is known as
revenue payments or expenses. These payments are regular in nature
E.g. payment of salary, wages, telephone bill, advertisement expense, purchase of
goods expense etc.

14. Accounting
terminologi
es
Note: Profit or loss of any
business is determine
from revenue income
and revenue expenses.
Profit: When total revenue
income is more than total
revenue expenses the
difference is known as a
profit.
• Profit= Total revenue income --
Total revenue expenses.
Loss: When total revenue
expenses are more than
total revenue income the
difference is known as a
loss
Loss= Total revenue
expenses—Total revenue
income
Stock: The goods remain
unsold at any point of time
in business is known as
stock.
• Stock= Purchased goods—Sold
goods (at cost price) 12000 =
Rs. 50000—Rs. 38000

15. Accounting
terminologie
s
Debtors: When goods are sold on credit, the customers
are known as debtors.
E.g. Goods of rupees 4000 sold to Varun for one month’s credit.
Here Varun becomes debtor of our business.
Bills receivable: Bills receivable is another form of debtors. It is
written document prepaid
by seller on the customer for the amount receivable in
future.
Note: Debtors and bills receivable both are considered as
current assets of business.
Receivables: Receivable includes debtors, bills receivable,
outstanding incomes, and prepaid expenses
Creditors: When goods are purchased on credit, the suppliers
of the goods are known as creditors.
E.g. Purchased goods of rupees 23000 from Sharukh on 1
week’s credit.
Here Shahrukh become the creditor of our business.

16. Accounting terminologies
Payables: Includes creditors, bills payable, outstanding expense
and income received in advance.
Voucher: Voucher is a written evidence of transaction in business.
E.g. purchase bill, sales bill, pay in slip, cheque, receipt received,
salary voucher, other expenses voucher
etc.
Bad debts: The amount of credit sales which cannot be recovered
from debtors is known as bad
debts. Bad debts is a loss for business
Bad debts return/ recovered: if any amount recovered from the
debtors which is recorded as a bad debts earlier is known as bad
debt recovered. It is considered as income for business