Basic Terminology of Accounting.

Basic terminology of Accounting|Business transactions|Account|Capital|Drawings|Liabilities|Assets.

In business, various accounting terms are used. It is necessary to understand the terms as they are part of the standard accounting terminology.

Basic terminology of Accounting

1. Business Transaction: The term 'Business Transaction' means a financial transaction or event entered into by two parties. It is a financial event expressed in terms of money which brings a change the financial position of an enterprise.

Examples of business transactions are sales of goods, purchases of goods, receipt from debtors, payment to creditors, purchase or sale of fixed assets, etc.

A transaction may be a cash transaction or a credit transaction.

When the amount is transacted immediately on entering into a transaction it is a cash transaction,

and where it is promised to pay later, it is a credit transaction.

2. Account: Account is a summarised record of transactions relating to a particular head at one place.

For example, purchases of goods, whether cash or credit, are shown is Purchases Account.

3. Capital: Capital is the amount invested by the proprietor or partner in the business It may be in the form of money or assets having a monetary value. It is a liability of the business towards the proprietor or partner.

Capital = Assets-Liabilities

4. Drawings: It is the amount withdrawn or goods taken by the proprietor or partner for personal use. Goods so taken by the proprietor or partner are valued at purchase cost. Drawings reduces the investment (or capital) of the owners.

5. Liabilities: Liabilities mean amount owed (payable) by the business. Liability towards the owners of the business is termed as internal liability. On the other hand, liability towards the outsiders, i.e., other than the owners (proprietor) is termed as external liability. External liability arises because of credit transactions or loans taken.

Examples of external liability are creditors, bank overdraft, long-term borrowings, and other liabilities.

Liability can be further classified into:

(i) Non-current Liability: Non-current Liability is that liability which is payable after a period of more than a year from the end of the accounting period.

Examples of Non-current Liability are long-term loans, debentures, etc.

(ii) Current Liability: Current Liability is that liability which is payable within 12 months from the end of the accounting period. Examples of Current Liability are creditors, bills payable, short-term loans, etc.

6. Assets: Assets are the properties (tangible assets and intangible assets) owned by a business. They are the economic resources of the business. In other words, anything which will enable the firm to get cash or an economic benefit in the future, is an asset.

Examples of assets are land, building, machinery, furniture, stock, debtors, cash bank balances, trademarks, copyrights, goodwill, etc.

Assets can be classified into (1) Non-current Assets, (2) Current Assets, (3) Fictitious Assets:

(1) Non-current Assets: Non-current Assets are those assets which are held by business not with the purpose to resell but are held either as investment or facilitate business operations. In other words, those assets are held by busi business from a long-term point of view.

Examples of non-current assets a Fixed assets, Non-current Investments, Long-term Loans and Advances Other Non-current Assets.

1. Fixed Assets: Fixed assets are those non-current assets of an enterprise which

are held not to resell but with the purpose to increase its earning capacity.

Fixed assets are further classified into:

(a) Tangible Assets: Tangible Assets are those assets which have physic existence, i.e., they can be seen and touched. Examples of tangible assets a land, building, machinery, computer, furniture, etc.

(b) Intangible Assets: Intangible Assets are those assets which do not has physical existence, i.e., they cannot be seen and touched. 

Examples intangible assets are patents, goodwill, trademarks, Computer Software, etc.

(2) Current Assets: Current Assets are those assets which are held by the busines with the the purpose  of converting them into cash within a short period, i.e., one year. 

For example, goods are purchased with a purpose to resell and earn ,debtors exist to convert them into cash, i.e., receive the amount from them. They are so classified because a part of the benefit from such expenses is available in the next accounting year.

(3) Fictitious Assets: Fictitious Assets are those assets which are neither tangible assets nor intangible assets. They are losses not written off in the year in which they are incurred but in more than one accounting period.

In the case of firms, an example of fictitious asset is Deferred Revenue Expenditure. Discount or Loss on Issue of Debentures is an example of fictitious asset in the case of companies.

So in this blog we have discussed six basic terms of Accounting. In next blog we will understand some more important terms. I hope you would have found this blog helpful. If yes don't forget to write your comment and suggestions.

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