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Accounting Terminologies-I

Accounting Terminologies - Success Roar Classes

What is Accounting Terminology?

  1. In accounting, certain terms have their specific meanings which are used with the same meaning and sense in the whole accounting process. These terms are known as Accounting Terminologies.
  2. For example, if we check for a dictionary meaning of drawings it will define it as “a drawing or art or picture etc. But in accounting drawings means the amount withdrawn by the owner from the business. This specific meaning will only be used in accounting.
  3. This topic includes the following terms –
    1. Business Entity
    2. Transactions
    3. Events
    4. Capital
    5. Drawings
    6. Account

What is Business Entity?

  1. Business entity-
    1. A business entity means an organization created for a specific purpose and has a separate existence.
    2. It is also called a specifically identifiable business or accounting entity (as accounting is always done for some specific business entity.
    3. A business entity can be in the form of a Sole proprietorship, a Company, a branch, etc. Examples of Reliance Industries, TATA Consultancy Services, ICICI Bank, etc.

What is a transaction?

  1. Meaning of Transaction
    1. A transaction in business means an economic activity between two or more entities involving some values that change the financial position of the business.
    2. A change in financial position means a change in asset, liability, or capital of the business.
    3. A business transaction can be in the form of purchase of goods, sale of goods, payment for expenses, etc. A transaction can be in cash or on credit.
  2. Characteristics of a transaction
    1. It involves an economic activity. For example, purchase, sales, payment of expenses, payment of salary.
    2. in the definition of the transaction. For example, helping mother, doing work of a friend.
    3. A transaction can be in cash or credit.
    4. A transaction can be of two types – external and internal.
      • External Transactions mean a transaction between two separate entities. For example, sale of goods, purchase of a machine, etc.
      • Internal Transactions mean a transaction within the organization. For example, Depreciation on purchased machinery, loss of goods by fire, transfer of goods between two departments of the business entity.
    5. It involves some monetary value.
    6. It results in changes in the financial position of the business entity. For example, payment to a lender will decrease the liability as well as cash (asset) of the entity. (Accounting Terminologies-I)

What is an Event?

  1. Event means result or outcome of a transaction.
  2. For example, payment to a creditor will result in a decrease in cash and a decrease in the liability of an organization. (Accounting Terminologies-I)

Example:

Jai invested 2,00,000 in his business and stock of 1,00,000. He purchases goods for 50,000 in Cash. On the same day, he made a sale of 40,000 which was 25% of the goods initially invested in the business. He also paid 10,000 for electricity and 5000 for stationery expenses. Find out the transactions from the above.

TransactionAmountImpact on assetImpact on liabilitiesImpact on Profit
Introduction of Cash into business2,00,000Increase in Cash by 2,00,000Increase in Capital by 2,00,000No Impact
Introduction of Stock into business1,00,000Increase in Stock by 1,00,000Increase in Capital by 1,00,000No Impact
Purchase of goods50,000Decrease in Cash by 50,000 Increase in Stock by 50,000No Impact if the purchase is in cashNo impact if adjusted against sales amount
Sales40,000Increase in Cash by 40,000 Decrease in Stock by 40,000No impactIncrease in profit by 15,000 (40,000-25,000)
Payment of electricity bill10,000Decrease in Cash by 10,000No impactDecrease in profit by 10,000
Payment of stationary expenses5,000Decrease in Cash by 5000No impactDecrease in profit by 5000

What is a Capital?

  1. Capital means any amount invested by the owner in the business entity is known as capital. Capital may be in form of cash, stock, or any other valuable asset.
  2. Capital is an obligation or liability of the business towards the owner. Hence capital is shown on the liabilities side of the balance sheet.
  3. For the calculation of capital following formula is used-
    • Total of all current and non-current asset* – External liabilities in Short ASSET-LIABILITIES
Non-Current AssetCurrent AssetExternal LiabilitiesCapital
100,00050,00025,000?
?2,50,0003,50,0003,00,000
200,00050,000?1,70,000

Note: Here in asset fictitious assets are not included

4. The capital is also called net worth, Owners Equity, capital employed, net asset, etc.

What is a Drawing?

  1. When an owner withdraws any money or goods from the business for his personal use, then such withdrawal is known as drawings.
  2. Drawings result in a decrease in the capital of the owner. (Accounting Terminologies-I)
  3. For example, Modi withdraws 5,000 from the business to pay a refreshment bill of 1000 of business and 4000 for his son’s school fee. Here 1000 is an expense of the business, but 4,000 has been used by the owner for his personal expense. It will be called drawings.

What is an Account?

  • An account is a place to classify transactions of the same nature at a single place.

An Account is a ledger record in a summarized form, of all the transactions that have taken place with the particular person or things specified.

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  • The account can be related to some specific items like Sales Account, Purchase Account, Rent Account, etc., or any person, for example, Modi’s Account, Trump’s Account, Jayantilal’s Account, etc. (Accounting Terminologies-I)
  • Characteristics of an Account
    • The account is prepared based on original books of entries i.e., Journal or subsidiary books.
    • The Account is prepared in T shape. An Account is abbreviated as A/c.
    • It has two sides.
    • The left-hand side is called the debit side (Dr.)
    • The right-hand side credit side (Cr.).
  • Proforma of Account

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