Accounting
Terminology
By: Dr. Deepika Saxena
Associate Professor , JIMS
Accounting Terminology
1. CAPITAL:
It means the amount (in terms of money
or assets having money value) which the
proprietor has invested in the firm. For
the firm, capital is liability towards the
owner.
2. LIABILITY: Liability means the amount which
the firm owes to outsiders, (except the
proprietor). The claims of those who are not
owners are called Liability.
Liabilities = Assets – Capital
Long term Liability: those liabilities which are
payable after a long term, e.g., long term
loans, debentures.
Current Liability: those liabilities which are
payable in near future (generally within one
year). E.g. creditors, bank overdraft, bill
payable, short-term loans, etc.
3. ASSET:
Anything which enables a firm to get cash or
a benefit in future, is an asset.
“Assets are future economic benefits which
are owned or controlled by an organization
or individual”.
E.g. Money owing by debtors, stock of
goods, cash, furniture, machines, buildings,
etc.
Types of Assets:
Fixed Assets (Non-Current Assets): those
assets which are purchased for the purpose
of operating the business but not for resale.
E.g. : land, building, machinery, furniture,
motor car etc.
Current Assets: those assets of the
business which are kept for short term for
converting into cash or for resale. E.g.:
unsold goods, debtors, bills receivables, bank
balance, etc.
4. REVENUE:
The total amount of money received by the
company for goods sold or services provided
during a certain time period.
Revenue is different from the income.
Income = Revenue - Expenses
5 . EXPENDITURE:
Expenditure is any amount paid for increase in
assets of business. E.g. Raw material For
business, Furniture for Business, etc .
Incurring a liability or disbursement of cash for
the purpose of obtaining assets, goods or
services.
The benefits derived from incurring an
expenditure are taken for a longer period of
time.
Types of Expenditure:
Capital Expenditure: incurred for obtaining a long term
advantage.
Revenue Expenditure: incurred where benefits expire
within a year or which has been incurred merely to maintain
the business or keep the assets in good working conditions.
Deferred Revenue Expenditure: incurred but carried
forward on the presumption that it will be of benefit over
subsequent periods.
6. EXPENSE:
It is the amount spent in order to produce
and sell the goods and services which
produces the revenue.
The benefits derived from an expense are
consumed in the same period. E.g.
payment of salaries, rent etc.
7. PURCHASES:
The term ‘purchases’ is used only for the
purchase of goods.
Goods are those things which are purchased
for resale or for producing the finished
products which also meant to be sold.
Purchases include both cash and credit
purchases of goods.
8. SALES:
The term ‘sales’ is used only for the sale of
goods.
Sales include both cash and credit (payment
is not received at the time of sale) sale of
goods.
9. STOCK:
The term ‘stock’ includes goods lying unsold on a
particular date.
The stock may be:
Opening stock – means goods lying unsold in
the beginning of the accounting year.
Closing stock - means goods lying unsold at
the end of the accounting year.
10. DEBTORS:
A Person who owes money to the firm mostly on
account of credit sales of goods is called a debtor.
11. RECEIVABLES:
Receivables may be in the form of bills receivables or
any other form except in the form of debtors.
The amount due to business entity from outsiders
which are not included in debtors are covered under
this head.
e.g. bills of exchange, amount receivables on account
of subsidy etc.
12. CREDITORS:
A person to whom money is owing by the firm is
called a creditor.
13. PAYABLES:
Payables may be in the form of bills payable or any
other form except in the form of creditors.
The amount to be paid to outsiders by business
entity except sundry creditors are covered under
this head.
e.g. bills of exchange, expenses payable.
14. DRAWING:
It is the amount of money or the value of
goods which the proprietor takes for his
domestic or personal use.
15. Discount:
An allowance or deduction allowed from an amount due is
termed as Discount.
Trade Discount: deduction allowed to the buyers from the
gross or catalogue price.
Quantity Discount: deduction allowed to the buyers from
the gross or catalogue price on making bulk purchases.
Cash Discount: Discount allowed on prompt payment.
Systems of Accounting
1. Cash System of Accounting
2. Mercantile / Accrual System of
Accounting
Cash System of Accounting
System in which accounting entries are
made only when cash is received or paid.
No entry is made when a payment or
receipts is merely due.
Accrual System of
Accounting
A system in which accounting entries are made on
the basis of amounts having become due for
payment or receipt.
This system recognizes the fact that if a transaction
has occurred, its consequences cannot be avoided,
and therefore, should be brought into the books in
order to present a meaningful picture of profit earned
or loss suffered and also of financial position of the
firm concerned.
