BASIC TERMS USED IN ACCOUNTS

1. Entry

Recording of a transaction in any book of accounting is called an Entry.

2. Proprietor (Owner)

The person who invests his money in the business and bears all the risks connected with the business is called the proprietor.

3. Capital

It means the amount invested by the proprietor in the business. For the business, capital is a liability towards the owner. It is an owner’s account i.e. a personal account.

4. Assets
Economic resources owned by an entity which may or may not have realizable value. An expenditure will be classified as an asset when the benefit from which is yet to be enjoyed.

5. Liabilities

The amount which the business owes and has to return to the outsiders is termed Liabilities.

6. Debtor

A person who owes money to the business mostly on account of credit sales of goods

For example, when goods are sold to a person on credit that person pays the price in future. He is called a debtor because he owes the amount to the organisation.

7. Creditor

Any person who gives credit is a creditor. The proprietor gives money to the business so he is a creditor to the business. A creditor is a person to whom money is owed by the business organisation.

8. Revenue or Income

It is the income of a recurring or non recurring nature from any source related/not related to business.

9. Expense

It is the amount spent in order to produce and sell the goods and services which generate the revenue. For example, payment of salaries to bring some benefit to the business. Expenses can be of the following types:

Revenue Expenditure or Expenses

When the benefit of an expense is not likely to be available for one year or less, it is treated as revenue. For example, salaries, wages, power and fuel, maintenance expenses of assets etc.

Capital Expenditure

When the benefit of an expenditure is not exhausted in the year in which it was incurred but is available over a number of years, it is considered as Capital Expenditure. Expenditure incurred for purchase of fixed asset is the best example.

Deferred Revenue Expenses

When the benefit of a revenue expenditure continues for more than one year, it is treated as Deferred Revenue Expense. Such expenditure is not written off in one year but over a period of 2 or 3 years. For example, expenditure incurred on heavy advertisement.

Revenue Expenditure is a Nominal Account, since it is a current expenditure. Whereas capital expenditure is a Real Account, since it is used for buying fixed assets.

10. Purchases

The term purchase 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 are meant to be sold.

Goods purchased for cash are called Cash Purchases whereas goods purchased on credit are called Credit Purchases. 'Purchases' includes both cash and credit purchase of goods.

11. Sales

The term sale is used for the sale of goods only. When goods are sold for cash, they are Cash Sales but if they are sold on credit it is referred to as Credit Sales. ‘Sales’ include both cash and credit sales.

12. Stock

The term Stock refers to goods lying unsold on a particular date. Stock is valued on the cost or market price whichever is less. It may be an opening or a closing stock. 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 period.

13. Losses

Loss is something against which the business receives no benefit. For example, loss by theft, loss by fire etc.

14. Drawings

It is the amount of money taken away by the proprietor for his personal use.

15. Discount

When customers are allowed any deduction or allowance from an amount due, that is called Discount. Discount payable is an expense of the organisation where discount received is an income. Discount can be trade discount or cash discount.

Trade Discount

When some discount is allowed in the prices of goods on the basis of sales of the items, it is called Trade Discount. Trade discounts are not recorded in the books of accounts.

Cash Discount

When debtors are allowed some discount in the prices of the goods for quick payment, it is called Cash Discount.

16. Solvent

A person who is in a position to pay his debts as they become due.

17. Insolvent

A person who is not in a position to pay his debts as they become due.

18. Bad Debts

When debtors fail to pay their dues either partially or completely and all hope of recovering the amount is lost, the amount owed by such debtors is termed as bad debts and it is a loss to the business.

19. Reserve for Bad Debts/Provision for Bad Debts

A reserve from the profits of the business is created for bad and doubtful debts. It is created to meet any anticipated loss on account of bad debts.

20. Wages

It is the remuneration paid to the labourers in a factory.

21. Salaries

It is the remuneration paid to the employees working in the administrative building.

22. Profit

After paying all the possible expenses relating to the business viz. wage, salaries, rent, interest etc. the surplus amount that is left is called the profit. It is a gain hence is a Nominal Account.

23. Brokerage /Commission

This is an expense of the business. It is a Nominal Account.