Account
An account is a summary of relevant transactions at one place relating to particular head.
Debit
} Derived from the Latin word ‘debitum’ which means ‘due for that’.
} It is known as ‘benefit receiving aspect’ of the transaction.
Credit
} Derived from the Latin word ‘Creder’ which means ‘due to that’.
} It’s known as ‘benefit giving aspect’ of a transaction.
Accounting Equation
The formula used to prepare Accounting Equation is
Assets = Liabilities + Capital
Capital
} The amount of money invested by the proprietor into the business is called as ‘capital’.
} This is treated as a liability since the owner and business have separate distinct entities.
Equity
It denotes the value of the business to the owner.
Equity = Assets - Liabilities
Assets
} Asset represents what a business owns.
} All assets will show debit balance.
Example for Assets: Cash, Bank, Investments, Motor Vehicle, etc.,
Liabilities
} Liabilities represent the amount that the business owes.
} All liabilities will show credit balance.
} Example for liabilities: Bank overdraft, loans taken out for business and money owed by the business to its suppliers.
Trade Creditors
Suppliers to whom the business owes money for the credit purchase of stock item are called as ‘trade creditors’.
Non Trade Creditors
Persons to whom the business owes money for activities other than trade are called as ‘ Non Trade Creditors’.
Trade Debtors
} Customers who owe money to the business for the credit purchase of stock are called as ‘trade debtors’.
Non Trade Debtors
Persons who owe money to our business for activities other than trade are called as ‘non trade debtors’.
Examples : Advances recoverable from employees, Loans and Advances due from private parties etc.,
Current Assets
} Those assets that can be converted into cash within an operating cycle or one year can be regarded as a current asset.
Current Liabilities
Those liabilities that are to b e discharged within an operating cycle or one year are known as ‘Current Liabilities’.
Entry
Part of a transaction recorded in the journal or posted to the ledger is known as an ‘entry’.
Equity
It denotes the value of the business to the owner.
Equity = Assets - Liabilities
Fixed Assets
Assets that are kept for a long term use are called as ‘fixed assets’.
Depreciation
Reduction in the revenue generating capacity of an asset is known as ‘depreciation’.
Appreciation
} Increase in the value of a fixed asset during its usage is known as ‘appreciation’.
} Usually, the value of land alone gets appreciated.
Intangible Asset
} An asset that cannot be seen, touched or felt may be called as an ‘intangible asset’.
} It implies that an intangible asset has no physical existence.
} Assets of financial nature come under this category.
} Examples for intangible asset : Good Will (Reputation of the firm), Endowment Policy etc.,
Income
} Money received by the business from its commercial activities is known as ‘income’.
Overheads
} Indirect costs involved in running a business are called as ‘overheads’.
} In other words:-
§ Indirect expenses are grouped as overheads.
Invoice
} Invoice is the original document either issued by the business for sale of goods or received by the business for purchase of goods.
} Thus, it may be a purchase invoice or sales invoice.
Receipt
} Receipt is an acknowledgement for receipt of cash.
} Receipt form evidence for entries in cash book.
Profit And Loss Account
} Profit and Loss Account is made up of Revenue and Expenses Account.
} It shows whether the business has earned Net Profit or Net Loss.
Provisions
} Provision is a charge against profit.
} It is created for a known liability or expense relating to the current period, the amount of which is uncertain.
} Examples: provision for Bad and Doubtful Debts, Provision for Repairs and Renewals etc.,
Reserves
} A part of the profit may be set aside and retained in the business to provide for certain future needs like growth and expansion or to meet future contingencies.
} A Reserve is an appropriation of profit.
Sales
} Income received from sale of goods or services is known as ‘sales’.
} Sale of fixed assets and investments do not form part of the sales turn over.
