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ACCOUNTING TERMS



A number of basic terms are used in accounting . So it is necessary to know the meanings of these basic accounting terms. The important accounting terms are :

1. TRANSACTION

Any exchange (dealing) of goods or services , for cash or on credit by the business with any other business.

FEATURES

1. Economic Activity – Example : Purchase of goods ; receiving cash or cheque from debtors etc; whereas inviting a friend on dinner is not economic but social activity.

2. Change may be quantitative or qualitative .

3. Change should be financial in nature.

2. ENTITY

The term ‘entity’ means something or someone having a separate existence . In other words , the term means a thing or a person having a definite separate existence . For instance , ‘business entity’ means a specially identifiable business enterprise, i.e. , a business enterprise having a separate entity or existence from that of the owners of the enterprise .

3.PROPRIETOR OR OWNER.

Proprietor is the person who invests money or money’s worth into the business as capital, and bears all the risks of the business.

For the risks undertaken by him, he is rewarded with profits.

The proprietors may be an individual as in the case of a sole trading concern,

Or partners as in case of a partnership firm , or shareholders as in case of a joint stock company.

4. EQUITY

‘Equity’ means the claims against the assets of an enterprise or rights in the assets of an enterprise. Equity is of two types , viz ; (i) owner’s equity (ii) outsiders’ equity.

Owner’s equity means the claims of the owner against the assets of the enterprise .

Outsider’s equity means outsiders’ claims against the assets of an enterprise .

5. CAPITAL

The amount of money or money’s worth ,say, stock of goods, furniture, machinery, etc. invested or introduced by the proprietor into his business at the time of the commencement of business is called Capital.

Capital can also be defined as the excess of the total assets of a business over its total liabilities at any particular time in the case of an existing or running business.

6. NET WORTH OR NET ASSETS

Net worth or net assets means the excess of the total assets of business over its total liabilities at any particular point of time. In other words , it is the net value of assets that belong to the owner . In short it means owner’s capital.

7.DRAWINGS

Drawing refer to cash , goods or any other asset withdrawn by the proprietor from his business for his personal , private or domestic use or purpose.

Drawings also include the personal , private or domestic expenses of the proprietor paid by the business.

8. ASSETS

The term ‘ASSET’ is derived ‘ASSEZ’ which means enough. So,literally, assets mean enough or sufficient economic resources owned by a business concern for carrying on the business.

Even, in accounting, assets mean resources, things or rights of value owned by a business undertaking.

Assets include:

(a) Physical or real properties or things called tangible assets.

(b) Rights in certain things or certain rights having money value called intangible assets.

(c) Debts or amounts due to a business from others.

9.LIABILITIES

The term ‘liabilities’ means claims of outsiders against a business concern which bind the business. In short , liabilities are outsiders’ equity (i.e. , outsider’s claims against the assets of a business concern ).Example :loans borrowed , bill payable, bank overdraft, sundry creditors etc.

10.DEBTOR

A Debtor is a person who owes money to the business. He owes money to the business because he has received some benefit from the business . A debtor constitutes an asset for the business.

A debtor may be :

(a) a trade debtor.

(b) a loan debtor

(c) a debtor for an asset sold on credit or

(d) a debtor for the service rendered on credit.

11.DOUBTFUL DEBT

A debt , the realization or recovery of which is uncertain or doubtful, is called doubtful debt. In other words , a debt which is doubtful of recovery is called a doubtful debt.

Doubtful debt is a possible loss to the business. So, it is necessary to estimate the loss that may arise on its recovery , and make a provision therefore.

12.CREDITOR

A creditor is a person to whom the business owes money . The business owes money to him, because he has given benefit to the business. A creditor constitutes a liability for the business.

A creditor may be (a) a trade creditor ,(b) a creditor for an asset purchased on credit and (c) a loan creditor (d) an expense creditor

13.SOLVENT

A Businessman is said to be solvent when he is able to pay his liabilities in full. In other words , a businessman is regarded as solvent, when his assets exceed his liabilities.

14.INSOLVENT

A Businessman is said to be insolvent when he is not able to pay his liabilities in full. In other words , a businessman is regarded as insolvent , when his assets are less than liabilities.

15.PURCHASES

Goods purchased by a business are called purchases. The purchases of goods may be cash purchases or credit purchases. The purchases of goods are recorded in purchases account.

16.SALES

Goods , sold by a business are called sales. The sales of goods may be cash sales or credit sales . The sales of goods may be cash sales or credit sales .The sales of goods are recorded in sales account.

17.DEBIT

The term ‘debit’ means what is due. It means the amount owed by or due from an account or charged to an account for the benefit received by that account. In short, it means the benefit received by an account.

18.CREDIT

The term ‘credit’ means the amount owed to an account for the benefit given by that account in the belief that its value will be returned at a later date. In short , it means the amount to be rewarded to an account or the amount of discharge to be given to an account for the benefit given by that account.

19.ENTRY

The record of a transaction in a book of accounts is known as an entry.

It may be noted that , strictly speaking, the term entry refers to the record of a transaction made for the first time. In this sense, an entry means a record of a transaction in the book of original entry.

20.CARRIED DOWN (c/d) AND BROUGHT DOWN (b/d)

The term ‘carried down’ is written in a ledger account, at the time of balancing it, at the end of an accounting period , to indicate that the balance in that account has been carried down to the next period.

The term ‘brought down’ is written in a ledger account, at beginning of the next accounting period , to indicate that the opening balance in that account has been brought down from the previous accounting period.

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