Capital and Drawings:

a) Capital : The total amount invested into the business by the owner is called capital.
Excess of assets over the liabilities is also called as capital. The equation for this is :
Capital = Assets – Liabilities
Capital is also known as shareholders Equity
Capital is a liability of the business as this amount is payable by the business enterprise to
the owner at the time of closure of the business.
Example :- Mr. A started business with Cash Rs. 500000 and Land and Buildiing Rs.
150000
Cash A/c Dr 50,000
Land and Building A/c Dr. 1,50,000
To Capital A/c 2,00,000

b) Drawings : The amount of cash or value of goods, assets, etc., withdrawn from the
business by the owner for personal use called as drawings.
E.g. : A proprietor pays colleges fees of his son, or pays for his medical expenses, mobile
bills etc, from the business.
Drawings A/c Dr 15000
To Cash A/c 15000

Debtors and Creditors:

a) Debtor : A person who has to pay to the business for getting goods and services on credit
is known as debtor. A debtor is a person who owes money to the business.
An Amount a company Has right to Collect becasue Goods and Services sold on
Credit basis to the customers. Asset Side

b) Creditor: A person to whom business has to pay for getting goods or services on credit is
known as creditor. A creditor is a person to whom business owes money.
An amount a company Has to Pay to the Vendor where Goods or Services Purchases
on Credit Basis. Lability Side

c) Bad Debts : An irrecoverable amount from a debtor is known as "Bad Debts". It is a

revenue loss to the business. It is shown on P and L Dr. side as a Loss

Expenditure and Types of Expenditure

Expenditure: An amount spent by the business for any consideration received by
business is called expenditure.

i) Capital Expenditure : This expenditure is incurred to acquire fixed asset or to increase

the value of fixed asset. It gives the benefit for a long period of time and it is non-
recurring in nature.
Its is Shown in Balancesheet Asset Side
E.g. : Purchase of Machinery, extension of building, purchase of computer etc.

ii) Revenue Expenditure : Revenue expenditure is an expenditure from which no future

benefit is expected but having immediate or short term benefit may be less than one
year. It does not increase profit earning capacity of an organization. These are normal day
to day operating expenses of a business organization and appear on the debit side of
Trading A/c or Profit and Loss A/c.
E.g. : Rent paid, Salary paid, Wages paid etc.

iii) Deferred Revenue Expenditure: An expenditure which is basically revenue in nature

but benefit of which is not exhausted within one year is called as Deferred Revenue
Expenditure. Such expenditure is written off over number of years. Such written off amount
is shown on debit side of profit and loss a/c and unwritten amount is shown on asset side of
the Balance Sheet.
E.g. : Heavy expenditure on advertising , heavy legal expenses, Preliminary Expenes.

Cash Discount and Trade Discount :

Discount is a concession or allowance given by the seller to purchaser.
There are two types of discounts.

i) Trade Discount : It is an allowance given on catalogue price or list price of goods. This
discount is allowed at the time of purchase/sale of goods. Value of goods
purchased/sold recorded is net value payable i.e after deduction of amount of trade discount
allowed. If goods of ` 1000/- are sold at 5% trade discount, the value of goods that will be
recorded will be ` 950/- both by the purchaser and the seller and not ` 1000/-. Hence, trade
discount does not appear in the books of accounts separately.

ii) Cash Discount: It is the amount deducted from the final amount due at the time of
receipt. It is the concession given for encouraging prompt payment. It is given either for
the spot payment or for payment within a specific period. Cash discount is calculated after
deducting trade discount, since it is loss to the seller and gain to the buyer, cash
discount appears in the books of accounts.

Solvent and Insolvent:

i) Solvent: If a person’s assets are more than his liabilities, or equal to his liabilities,
he is called as a solvent person. Solvent person is financially sound and is in a position to
pay off all his debts.
E.g. : A person’s total assets have been calculated to ` 50,00,000/- and his total debts were
` 30,00,000/- since his position is sound he is able to pay off his debts therefore he is called
Solvent.

ii) Insolvent: A person whose liabilities are more than his assets is an insolvent
person. Such person’s liabilities are more than his assets.
E.g. : A person’s total assets or property have been calculated to ` 20,00,000/- and his total
debts were ` 50,00,000/- and if he is not in a position to get any amount from any sources
and if the court is so satisfied then he will be declared as an insolvent person.

Accounting Year:
It is the period of 12 months for which accounts are maintained and closed by the proprietor.
Earlier the proprietors were following any accounting year i.e. calendar year , or financial
year or any other year as per tradition. But now for income tax purpose an accounting year
starts on 1st April and end on 31st March. At the end of accounting year a proprietor has to
prepare Trading account, Profit and Loss account and Balance Sheet to find out the financial
position of the business.
Current FY 1st April 2023 to 31st March 2024
Same as India for South Africa.
Trading Concern and Not for Profit Concerns

i) Trading Concern: A business concern established with an object of earning profit by

selling goods is known as Trading concern. It is also called as commercial organization
or profit making organization.
Example :- Reliance Group, Tata Group.
ii) Not for Profit Concern: It is an organization not established for making profit but for
rendering services to the society. An organization may be formed for promoting a useful
object like art, science, sports, culture, charity, profession etc.
e.g Schools, Hospitals, Sports Club etc

Goodwill:
Goodwill may be described as the aggregate of those intangible attributes of a business
which
contributes to its superior earning capacity over a normal return on investment. It may arise
from such attributes as favourable locations, the ability and skill of its employees and
management, quality of its products and services, customer satisfaction etc.
u Goodwill is the reputation of business expressed in terms of money.
u Goodwill is an intangible asset
a) Profit : When the selling price of goods is more than the cost price it is a profit. Profit
increases the capital of the business.
e.g. If goods are sold for ` 50,000/- and all expenses during the period amounted to
` 30,000/- then the profit is ` 20,000/-

b) Loss : When cost price of goods is more than its selling price it is a loss. Loss decreases
the capital of business
e.g If goods are sold for ` 50,000/- and all expenses during the period amounted to
` 60,000/, then the loss will be ` 10,000/-
c) Income: Net Profit is equal to Income. When all expenses is deduct from revenue is
called Income Expenses like COGS, Depreciation and Amortisation, Interest and Tax.

d) Revenue: It is income that a business has from its normal business activities usually from
the sale of goods and services to customer.
Which Earnings are generated from Business operations like Sale of goods or services
to customer is called Revenue

Assets, Liabilities, Net Worth:

i) Assets : Any physical thing or right owned that has a monetary value is called as an
asset. The ownership of the Asset must be with business unit.
E.g Land, Goodwill, Patents, Computers etc.

ii) Types of Assets:

a) Fixed Assets/Non current Assets : The assets which give long term benefit to the
business are known as fixed assets e.g Land and Building, Plant & Machinery, Goodwill etc.
These assets may be tangible or intangible.
Which Assets is not converted into cash within one year is knowns as Fixed Asset.

b) Current Assets : Assets which are held in the business for the operating year and
can be converted into cash very easily are called as current assets.
e.g Debtors, Bills Receivable, Cash in Hand, Cash at Bank, Stock etc.
Which Assets is converted into cash within one year is knowns as Current Asset.

Ex. Cash, Bank Balance, Inventory, Account Receivable, Marketable Securities etc.

c) Fictitious Assets : These assets are not represented by tangible possession or

property.
They are imaginary assets but do not have any realisable value.
e.g Deferred revenue expense like advertisement paid for 4 years.

iii) Liabilities: Amount payable by the business to others is known as liability. It is a debt
or amount due from the business to others for the benefit received by the business
unit.
e.g Loan taken, Creditors, Bank Overdraft, Outstanding Expenses etc.

iv) Types of Liabilities:

a) Fixed Liabilities : One of the major source of funds in the business is fixed liabilities.
It may be in the form of capital, secured loans, long term loans from banks and from
financial institutions etc.

b) Current Liabilities: Short term liabilities payable within a one year are called current
liabilities. Current liabilities arise in the regular current operations of the business. These
liabilities are not normally secured. E.g. Creditors, Bills Payable etc.

v) Net worth or Owners Equity or Capital:

The amount or funds provided by the proprietor in the business is called as “Capital” as
well as the excess of assets over liabilities of the business is also known as “Capital”
or “Net Worth”. Net worth includes Capital and Reserves. Capital can be in the form of cash
or in kind.

Net worth = Owner’s Equity = Capital

OR
Owner’s Equity (Capital)= Total Equity(Assets) – Creditors Equity(Liabilities)

Contingent Liabilities:
A liability which may arise in future depends on happening or non-happening of certain
event is called as contingent liability. As it is not confirmed or perfect liability, it does not
affect the financial position of the business and therefore, it is not shown on the liability
side of the Balance Sheet. But it is shown by way of foot note to Balance Sheet simply
as information.
e.g. A worker makes a claim for compensation of ` 5,000/- against the business and the
decision is pending in the court. It may be a future liability for business on happening of an
event i.e “Court Verdict”.