A business is an economic activity of the business that changes its financial position.

1. Basic Accounting Terms
1. Business Transaction: A businessis an economic activity of the businessthat
changes its financial position.
Features of a transactionare:
i) It involves economic activity.
ii) Transaction may be classified into two types- external and internal.
iii) The change mustbe capable of being expressed in terms of money.
2. Event: - The consequenceor result of a transaction.
3. Account: - An account is a record of all businesstransaction relating to a particular
person or item.
4. Capital: - The amountinvested by the proprietor in a business enterprise. It is the
amountwith the help of which goods and assets are purchased in the business.
Capital = Assets – Liabilities
5. Drawing: - Any cash or value of goods withdrawn by the owner for personaluseor
any privatepaymentsmadeout of business fundsarecalled drawings.
6. Liability: - The amountwhich the firm owes to outsiders
Liabilities = Assets – Capital
Liabilities may be divided into two parts:
i) Internal Liabilities: - All amounts which a business entity has to pay to the
proprietor.
ii) External Liabilities: - All amount which a business entity has to pay outsiders
Liabilities may be further classified into two parts as under: -
1) Non-Current Liabilities: - Those liabilities which fall due for payment in a
relatively long period.
2) Current Liabilities: - Those liabilities which are to be paid in near future.

2. 7. Assets: - Anything which is in the possession or is the property of a business
enterprise including the amounts due to it from others is called an asset.
Assets = liabilities + Capital
Assets may be classified into the following categories: -
1. Non-Current Assets: - Those assets which are held for continued use in the
business.
Fixed Assets are further classified into:
a) Tangible Assets: - Those assets which can be seen and touched.
b) Intangible Assets: - Those assets which do not have a physical existence.
2. Current Assets: - Those assets which are meant for sale or which the management
would want to convert into cash within one year.
3. Fictitious or Nominal Assets: - Assets which cannot be realized in Cash or no
further benefit can be derived from these assets.
8. Capital Receipts and Revenue Receipts: -
Capital Receipts:
i) Amountreceived from the sale of fixed assets or investments.
Revenue Receipts:
i) Money obtained from sale of goods.
9. Expenditure: - Any disbursementof cash or transfer of property or incurringa
liability for the purposeof acquiring assts, goods or services is called expenditure.
Expendituremay beclassified into three categories: i) Capitalexpenditure, ii)
Revenueexpenditureand iii)Deferred revenueexpenditure
i) Capital Expenditure: - Any expenditurewhichis incurred in acquiring or
increasing the valueof a fixed asset.
ii) Revenue Expenditure: - Any expenditure, thefullbenefit of which is received
duringoneaccountingperiod.
iii) DeferredRevenue Expenditure: - Expenditureswhich are revenuein nature
but the benefit of which is likely to be derived over a number of years.

3. 10. Expenses:- Cost incurred in producingand sellingthe goods and services.
11. Income:- Surplusof revenueover expensesis called ‘Income’.
Income = Revenue – Expense
12. Profit:- Excess of total revenueover total expenses of a business.
13. Gain: - It is a monetary benefit, profitor advantageresultingfrom events which are
incidental to business.
14. Loss:- It conveysthe resultof the businessfor a period when total expensesexceed
the total revenues. Somefact or activity against which firm receives no benefit.
15. Purchases: - The term Purchases is used only for the purchase of ‘Goods’in which
the businessdeals.
Purchase Returns: - When purchased goods are returned to the suppliers
16. Sales:- Sales means transfer of ownership of goods or services to customers for a
price.
Sales Returns: - Some customers might return the goodssold to them. These are termed
as sales returnsor ‘returns inwards’.
17. Stockor Inventory: - The valueof those goods which are lying unsold at the end of
accounting period.
18.