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g's'g, , 2, ACCOUNTING TERMINOLOGY, Learning Objectives, After studying this chapter, you should be able to, understand, Basic terms of accounting, , Synopsis, 1., , Assets, , 2., , Liability, , 3., , Capital, , 4., , Expense, , 5, , Income, , 6., , Expenditure, 6.1, , Capital Expenditure, , 6.2, , Revenue Expenditure, , 6.3, , Deferred Revenue Expenditure, , 7., , Revemue, , 8., , Debtors, , 9., , Creditors, , 10. Bills Receivable, 11. Bills Payable, , 12. Goods, 13. Cost, , 14. Stock, 15. Purchase, , 16. Sales, 17. Profit, 18. Loss, 19. Gain, , 20. Vouchers, 21. Discount, 22. Transaction - Cash Transaction, Credit Transaction, , 23. Drawings, , 24. Solvent and Insolven, 25. Accounting Year, 26. Trading and non Trading Concern, , 27. Goodwill, 28. Exercises

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Introduction to, , 1, , Financial Accounts, , (F. Y.BMS., , -, , Sem,-, , ASSET, , Definition:, "The entire, , property of all kinds possessed by or owing to a person or organisation Is caled as an, , by a business, , Assets are valuable resources owned, , asset., , to, , get, , some, , benefit in the, , future., , Features, 1. It is a claim for future service., 2., 3., 4., , t is transferable., An asset must be created by some sacrifice by the business., It must be sanctioned., , 5., 6., , It must possess the use value., Ownership of the asset must lie with the business unit., , 7., , It must have some exchange value., , Examples: Land and Building, Plant and Machinery, Debtors, Bils Receivable, Cash, Bank, Balance., Assets, , Fixed Assets, , Tangible, , Current Assets, , Intangible, Fig. 2.1, , Fixed Assets: These are the assets held by business enterprise for long term use. These assets, held for resale in the normal course of operation, , are not, , For Example: Land and Building, plant and machinery, furniture and fixtures, vehicles etc., Types of Fixed assets, , Tangible fixed assets: These are the assets which can be seen and touched. For example,, land and building, machinery, furniture etc., , Intangible fixed assets: These are the assets which cannot be seen and touched., For example Goodwill, patents, Trade makes,, copyrights etc., Current Assets There are the assets held for, short term purpose i.e. not more than, , one, , accounting year., , For Example: Cash balance,, bank balance, Debtors, stock of goods etc., These are the assets which are held:, i) in the form of cash, i) for conversion into cash, ii) for consumption in production of goods or, rendering services, Determination of whether an Asset is current Asset or fixed asset, The assets can be, distinguished as current asset or fixed asset by applying the, i) Is it Cash or Bank balance?, , following tests., , i) Is it expected to be converted into cash?, ii) Is it expected to be consumed in the, production of goods or services?, Conclusion, i) If all the answers are negative the a[set will be, considered as fixed asset., ii) If any of the answers are positive,, be, Test No., , Cash Bank, Yes, , 2, , 3, , Conclusion, , No, No, , Current, , Asset, , Stock of, Goods, No, , Yes, No, , the asset will, Stock of, , Material, No, No, Yes, , Current, , Current, , Asset, , Asset, , considered as current asset., Debtors, , Machinery, , Furniture, , No, , No, No, No, , No, No, No, , Yes, No, , Current, , Asset, , Fixed Asset, , Fixed, , Asset

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Accounting Terminolog, Liquid Assets, These are the current assets which can be covered into casi guiy. tEy ars l e r B P A, , WrSER, , 11att, , assets. For example cash, bank balance, denors, bils recivathe, ass,, assets are current assets, but all current assets are not iguici, , cash, , liquid, , pA. pIeAE EEES, , are not liquid assets., , curent assets of X Ltd. inchude, 15,000 and Bank balance 45,000. Prepaid insurance, Example: The, , Debtors, , Cash, , PB*, , 255I esers, 190. The kyi asPOs, , sck, , 5, Z, P, , 40,000, 15,000, , 45,000, , Bank, , 1,00,000, Fictitious assets, , The assets which are intangible and which canot be cvened ito ash a, assets., fictitious assets. They are imaginary, , They are to be writen oA oyer a, , GA, , cerein rARnÍAA, , JAS, , For example:, , i)Preliminary expenses, ), , Formation expenses, , of shares / Debentures, , ) Discount on issue, commission etc., iv) underwriting, 2., , LIABLITY, , roed r, , refer to debts or amounts due from a business to others eiter for morey, for, on credit or for services received without makire irmeicte poymeEL, goods or assets purchased, Liabilities, , r, e, , same., , Ervices a OrTE, I, the obligations or debts that the enterprise mus pay in moNEg, zss Calei, claims by others on the assets of the busiress. ThesE are, time in the future. These are the, ec., Derenzesiders, Claims on a business may be by the Credisors, Banks,, as Accounts Payable., benefit received by the business urit, These are the amounts payable for the, , These, , are, , Features, , A liability is raised out of the past transactions., 2. It cannot arise out of future transactions., the ouners., 3. It must be an established claim on, 4. The amount of liability must be fixed., essential, 5. Actual existence of a liability is, 1., , 6., , It must be legally enforceable., , Liabilities, Shot tern zbilties, , Long term liabilities, Fig 2.2, , Long term liabilities: There are, , the, , long term obligations wtich, , are, , payabie after a period, , of one year., , For examnple: Loan from bank., Short tem liabilities: There, , Debennures., are, , the short, , tern, , obligations wtich, , are, , payabie wirtin the, , period not exceeding one year., , For example:creditors, Bills payable,, 3., , Bank overdraft, shoT tem koans., , CAPITAL, , Total monetary value of every, , outside interests, , thing brought into the, , business, , by, , the proprietor fom his, , business. It s equai to tota, invested by the proprieor in business for use in, is invested, he form of cash, goods and assets. Amount, assets minus total liabilities. If is invested in, on the assets oÍ the orgarisaion., with a view to get a rerum in future. It is the owners claim, , It is the, , amount

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14, , Accounts, , to, I, , r, , t, , r, , o, , d, , u, , c, , t, , i, , o, , {P., , Y.BMS., , -Sen, , Financial, , n, , External, , Capital Assets Liabilities, For, , 20 000.enarple,, assetsinclude cash 20.0 Creditors, ties inchude Bani, 30.000, 0an, External, Capnai, , 1,00,000,, , 20,000, Building, , Assets-Liabilives, , Assets, , Machinery +, , Furnitts, 70,000,, , capital., , Calculate, , 20,00o., , Furniture, , Cash Building, 20.000, 2.10.000, , Exnermal, Liabilities, Capital, , 1.00.000+ 70.000 + 20,000, , =, , Creditors + Bank loan, , =, , 20.000, , =, , 50.000, , =, , 30.000, , 2.10.000, , 50,000, increasing, , apital is required to increase income., , Money can, , same. However,, , money are, , the, it is considered, then, L O r increasing income,, 4., EXPENSE, , erise, capital, , and, , as, , income., , role of, ess, into busines, perform the, invested, , 1,60.000., , a, , Machinery, , when money, , ir, is, , In, , for, , capital., the cosSt, services. It is, , or Use or, , things, , goods and, incurred for producing and selling, internal equiiy., It is the decrease in, , E torCOst, generation ofrevenue., viceS, , Expenses include:, a), , cost of goods sold, , paid for rent, commission, salary, advertising, , b), c), , depreciation on asset., , INCOME, , 5., , t, , Over, , etc., , of, , revenue, , of revenue, the expenses. Surplus, benefits, which remains after deducting, economic, in, It is the increase, , portion, It increases internal, expenses is called income., 15 tnat, , equity., , during the year, , Income=Revenue -Expenses, For example, 6,50,000 is, , 6., , :, , revenue., , The sale, 5,00,000 for 7 6,50,000., Mr. Deepak sold goods costing, income., is the, The difference7 1,50,000, The cost of F 5,00,000 is expense., , EXPENDITURE, , for acquiring assets,, a, transfer of property or incurring liability, It is the disbursement of cash,, benefit. It is the cost incurred for, incurred for receipt of some, is, It, services., always, or, goods, assets., form of outflow or depletion of, an asset or service in the, , acquiring, , cost., , It may be expired cost or unexpired, cost/ Expenses : It is that portion, , a) Expired, , of expenditure which, , has been consumed, , during the period., , which has not been, (Asset): It is that portion of the expenditure, It is an unconsumed portion of, consumed till the end of the accounting period., certain, , b) Unexpired, , cost, , cost becomes further expired cost, expenditure. The present unexpired, or revenue expenditure., period. Expenditure may be capital expenditure, , over a, , 6.1 Capital Expenditure, which is incurred to yield a benetit over a longer period. The benefit of, It is an expenditure, It is, not exhausted within one year, it is available for a number of years., such an expenditure is, It is, or an organisaion.. It is, nature., in, non-recurring, earming, increase, , incurred, , to, , capaEy, , profit, , Sheet on asset side., shown in the Balance, treated as capital expenditure, Following expenses, which results in acquisition of a permanentasset, , are, , a) Expenditure, , purchase, b) Expenditure regarding, installation, , c)Expenditure on, Expenditure to get the, , d), , of fixed, , assets., , of fixed assets., , right of carrying on business.

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15, docounting Terminolog, Example:, , i), , Purchase of machinery 7 so0,000., , ), , 2,000., Wages paid for installation of a machine 7, , 6.2 Revenue Expenditure, , It is the expenditure the benefit, , of which is not likely to, , does not increase the cost of any assets. It, , be, , than one year.It, earning capacity of an, , available tor more, , does not increase pront, , organisation., , For example:, a) Expenses of day to day operations of an organisation., b) Expenses for maintenance of fixed assets., c) Depreciation of fixed assets., , Epenses on purchase of stock of materials and goods., d debit, side of Profit and Loss Account., , Revenue expenalure, , is shown on, , 6.3 Deferred Revenue Expenditure, , The expenditure which is basically revenue in naure, but the benefit of which is not exnausted, , within one year, such expenses are written off over certain number of years. The amount wlten on, tne, n, unwritten off is shoWn, is shown on debit side of Profit and Loss Account and the amount, Balance Sheet on asset side., , For example:, a), , Expenses on repairs of assets., , b)White washing for the first time on purchase of old building., c)Heavy expenditure on advertising., d) Heavy legal expenses., 7., , REVENUE, , It is the income of a recurring nature from any source. It is the amount charged for, , goods sold or services rendered. It includes:, , a) amount received from sale of goods., b) amount received from services provided, , c), , receipt of rent, , d) receipt of dividend, , e)receipt of commission, ), , receipt of interest, , Revenue arises from day to day affairs of the business. It should be regular in nature. Capital, introduced by the propnetor or loan taken from bank is not a revenue., , 8., , DEBTORS, These are the persons and other entities who are to pay an enterprise an amount for receiving, , goods and services on credit. For example, 100 units of, , 50 each sold to X on credit. X will be, , debtor by 7 5.000, Sundry debtors represent amount outstanding and due from customers against credit sales., For example, amount due from Mr. X 7 30,000, Mr. Y F 35,000 Mr. 27 1,05,000., , 9., , CREDITORS, These are the persons and other entities who have to be paid by an enterprise an amount for, providing goods or services on credit. For example, 100 units at 20 each are purchased from Mr., , Yon credit. Mr Ywill be creditor by T 2,000., Sundry creditors represent amount payable to suppliers against credit purchases., For Example, amount due to Mr. A T 20,000, Mr B 30,000 and Mr. C7 20,000. Sundry, , creditors will be 70,000, , Example:, Mr. X sold goods worth 10,000 to Mr. Y on credit., In this case Mr. Y becomes a debtor of Mr. X. Mr. X becomes a creditor of Mr. Y, so long as the, account is not settled, 10. BLLS RECEVABLE, It is an unconditional order in wriing signed by the creditor and drawn on the debtor to pay a, ertain surm of money on demand or at a certain date in future a certain sum of money to or to the

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Accounting Terminology, , 17, , In the case of a manufacturlng concern, the stock can be of three, types :, Stock of Raw Materials, tt is the stock of raw material, purchased lying unused., For example stock of steel in steel furniture, making firm., Stock of work in progress, It is the stock of goods, remaining unfinished in the process of manufacture. For, glass made with steel Iying im the, , Stock of finished Goods, It is the stock of goods, , factory without finishing and, , polishing., , example,, , steel, , fully processed, Customers orders. For example, cars in the car remaining unsold in the warehouse waiting for, factory., It should be ensured that, following, are not included in the list, goods, of stock:, i) Goods sold but not delivered., Goods, i), purchased and received but not, in the books., Following goods should be included in recorded, the list of stock, ) Goods sent to customers on Sale or, Return basis., ) Goods sent to the agents but, unsold, remaining, Stock should be always valued at cost or at, market value whichever is less., 15. PURCHASES, It refers to purchase of goods for, resale in the, profit. It does not mean purchase of assets., , ordinary course of business with a vieW to ea, a dealer in, Jayant,, furniture, purchases furniture and, a car. Mr. Jayant is a dealer in, furniture. Hence, purchase of, is purchases for, furniture, as, of, Where purchase a car is not purchase because, Jayant., he is not dealing in car. It is a, purchase of asset., 16. SALES, Mr., , It is the total revenue from sale of, goods and services during the accounting year. The margin, or loss is included in it. Sales, can be credit, cash sales and exports. Sale does not, include any amount realized from the sale of any asset.sales,, For example Mr. Yashwant sold TV who is, dealing in TV. If Mr. Yashwant sold his old furniture for, 10,500 it is not considered as sales as old, furniture is an asset., 17. PROFIT, , of, , profit, , Profit, , :It is the excess of, revenues, It increases the owner's, , Example:, , equity., , over, , expenses during the, , accounting, , year., , Mr. Deepak supplied, goods and services valued for sale at 7 1,50,000 to, Mr. Chetan, and the, expenses incurred by Mr. Deepak in order to supply those, goods and services amounted to{ 80,000. The, will be :, , profit, , Revenue, , Sales, Less: Expenses, Profit, , 18. LOSS, , Loss, , 1,50,000, , 80,000, 70,000, , :It is the excess of expenses over revenues. It, represents reduction in owner's, equity due to inability of the firm to release the assets used in business., Expenses, incurred to earn revenue are more. Loss is incurred when revenue, earned is less, than expenditure., , Example:, Mr. Dinesh supplied goods and services valued for, sale at, 90,000 to, Ms. Disha. The expenses incurred by Mr. Dinesh to, those goods, supply, amounted to F 1,00,000. The loss will be:, Revenue :, , Sales, , Less: Expenses, , 90,000, , 1,00,000, , Loss, 10.000, It also arises due to loss of business, assets, e.g., stolen, car met with an accident., , goods, , lost, , by fire, theft, cash

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Pinancial Accounte, Introduetinn to, , (F, , YBMS, , -, , Sem., , 19 GAIN, dVAntage, , eamed, , than from sale, transaction other, from the incidental, , Services is called as gain. It is the increase n, , A, , example monetary benefit from sale of investmet, or2.55.000. Here, the gain is? 55,000., , larnd costing 7 2,00,000 Is sole, , 20. vouCHER, , must, , Sactions, Vouchers are the, , Ba, support the transactions., Ucher, , is, , a, , be supported, , by, , in support of, documentary evidence, , Voucher may be, , a, , receipt,, , an, , invoice,, , Features, , features of a, following are the important, , i), , documentary, , Vouchers are, documentary evidence., , accounts., A, , proper, , It is, , a, , documentary evidence, , It is, , a, , written document, , an, , an, , which is, , called, the documentary proofs, evidence, , as, , to, , in the books of, entry appearing, , agreement, written, , voucher, , of, , requisition, slip,, , etc., , :, , appearing in the books of accounts., transaction., iv) It shows full description of the, in the books of accounts., v) It substantiate the accuracy of the entries, Examples, i) It supports the entry, , i), , Cash Receipt, Cash memo, , ii) Purchase Invoice, , iv) Sales Invoice, , v)Debit Note, vi) Credit Note, 21. DIScOUNT, , Cash Discount, It is the concession allowed by the seller to the buyer to encourage him to make the payment, , prompty. It is allowed when the buyer pays the amount within a stipulated period. Cash discount is, , charged on the amount arising after deduction of trade discount from the list price. It is recorded in, the books of accounts., The condition regarding cash discount is mentioned in the invoice., , For example:, Terms 5/10. It means 5% cash discount is allowed if the payment is made within 10 days., Cash discount is a loss to the seller and a gain to the buyer., , Trade Discount, It is the allowance allowed by a manufacturer or wholesaler to the retailer. The purpose is to, , enable the retailers to sell the goods at list price and earn profits. The amount of trade discount is, deducted from the list price. It is shown in the invoice. It is not recorded in the books of accouns., , For example:, Mr. Vishal sold goods to Ms Jigna R 20,000 less 10% trade discount and 5% cash discount terms, if payment is made within one week., , In this case the amount of trade discount will be :, List Price, , 20,000, , Less : Trade discount 10%, , 2.000, 18,000, 900, , Less: Cash discount 5%, , 17100

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AccountingTerminolog, , 19, , daction between Trade Discount and Cash Discount, Point of, , Trade Discount, , Cash Discount, , distinction, Meaning, , 1., , t is a reduction granted by the, , It is, , supplier from the list price of, , supplier, , a, , reduction granted, by a, from the invoice, price, , consideration, , goods or services on business, , in, , consideration., , payment or payment within a, , of, , immediate, , stipulated period., , 3., , Purpose, , It is allowed to promote sales., , It, , is, , allowed to, prompt payment., , encourage, , When allowed, , It is allowed on purchase of, , It, , is, , immediate, , goods., It is disclosed in the, invoice by, way of deduction in the invoice, , Disclosure, , allowed, , on, , payment., is not shown in the, , It, , invoice, , itself., Accounting, , ., , Basis, , of, , calculation, ., , Recipient, , 8., , Time, , 9., , It is not recorded in the books, , It is recorded in the books of, , of accounts., , accounts., , It is, , calculated, , on, , the list, , of goods., , due, , It is allowed to those who make, , It is allowed to all customers., , prompt payment., It is allowed at the time of I t is, , Simultaneousness, , buying and selling,, Along, , with, , trade, , discount, , cash discount may beallowed, , 22., , It is calculated on the amount, , price, , allowed, , at, , the, , time, , of, , payment., Along with, discount, , cash discount trade, is not allowed., , TRANSACTIONS -CASH TRANSACTION, CREDIT TRANSACTION, , It is an event, the recognition of which gives rise to an entry in accounting records. A business, , transactiorn involves exchange of value or benefit between two persons. An exchange means giving, and receiving of equal values. Thus, any dealing of a business that involves buying and seling in, value may be called as a business transaction., , Features, 1., 2., , It is concermed with, money or money's, It brings about a change in financial, , worth. It is measurable in terms of money., , position of a business., , 3. It affects accounting equation of any fim., 4. It arises out of transfer or exchange of, goods, 5. It has dual aspects- receiving and, giving., 6., , or, , services., , Every transaction must be supported by a proper documentary evidence, which is called, as a voucher., , Transaction, , A. On the basis of, , relationship with, , B. On the basis of, nature of, , C. On the basis of, mode of, , D. On the basis of, , transaction, , settlement, , transaction, , the accounting unit, , Internal, , External, , visibility of, , Simple Compound Complex Cash, Credit, Paper, Physical, Transation Transation Transation Transation Transation Transation Transation Transation, Transation, , Non, , physical, Transation, , Fig. 2.6, , Types of Transactions, A1, Intemal Transaction, , It is concermed with internal working of an organisation such as, payment of repairs of assets, salary to employees, dividend to, , shareholders.

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B, , be l

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21, , Accounting Terminology, , For example:, , of ? 4,00,000 and liabilities, Ms Shruti has assets, Ms. Shruti is solvent., liabilities by 7 2,00,000, , 2,00,000. Her assets, , of, , Insolvent, , A person who is, , not, , in, , a, , position, , to, , pay off his debts is, , are more, , an insolvent, It means, , than her, her, , his liabilities, , are, , more than his assets., , For example, Ms. Jigna has assets of, more than, , her assets by, , 1,00,000. Ms., , 3,00,000 and liabilities of R 4,00,000. Her liabilities are, , Jigna is insolvent., , 25. ACCOUNTING YEAR, , be a financial year, calerndar, It is the year for which accounts are kept by a proprietor. It may, has to follow finanCial year as accounting, year, or any other year. For taxation purpose, everybody, March. At the end of the accounting year every, year. It begins on 1st April and ends on 31st, Sheet., proprietor has to prepare Profit and Loss Account and Balance, , 26. TRADING AND NON TRADING CONCERNS, , Trading Concern, , It is an organisation which is concerned with buying and selling of goods. Its objective is to buy, , and sell goods to earn profit. It is also called as a commercial organisation., Not For Profit' Concerns, , It is, , an, , society as, , a, , services to, organisation which is established not for making profit but for rendering, is, whole or a particular segment of a society. The objective of such an organisation, , profit but to render services., For example, schools, colleges, universities, clubs,, , to earn, , 27., , trusts,, , not, , hospitals and religious institutions etc., , GODWILL, , It is, , an, , intangible fixed, , business, having realisable value. It is the cost of reputation of a, value of future, as cost of business connections. It is the present, , asset, , organisation. It is also known, the market., expected earnings. It is the name established in, 28., , EXERCISES, , A, , Long Answer Questions, , ., , B., , the, , 2., , Explain the different types oftransactions., What are the tests of capital expenditure?, , 3., , What are the tests of revenue expenditure?, , Short Answer Questions:, ., , What is a Transaction?, , 2., 3., 4., , Who is a Debtor?, Who is a Creditor?, , What is Capital?, , 5., , What do you mean by Drawings?, , 6., , What is, , 7., 8., , Who is a solvent?, Who is an insolvent?, , 9., , What is an Asset?, , ., , a, , cash discount?, , 10. What is a Liability?, , 11. What is Capital Expenditure?, , 12. What is a Revenue Expenditure?