IMPORTANT TERMS

Accounting is a business language and to learn any language its alphabets are necessary to keep
in mind. These alphabets are explained in the form of following terms.
1TRANSACTION
Any dealing between two or more persons or parties for a particular thing is called a transaction.
Transaction is of two types.
Any event that changes the financial position of a business concern and that must be recorded in
the books of accounts is called Transaction. Transaction is of two kinds:
(i)
(ii)
Example:
(i)
(ii)
(iii)
(i)

Cash Transaction.
Credit Transaction
Goods purchased is a transaction.
Goods sold is a transaction.
Goods lost by fire is a transaction

CASH TRANSACTION

If cash is paid or received immediately as a result of a transaction, then this transaction is known
as Cash Transaction.
Example:
Purchased furniture for cash Rs. 10,000.
(ii)

CREDIT TRANSACTION

If payment or receipt of cash of a transaction is postponed at some future date, then this
transaction will be known as Credit Transaction.
Example:
Purchased furniture on credit Rs. 10,000.
2- BUSINESS
Any legal activity undertaken to earn profit is called business.
Example:
(i)
Manufacturing Business.
(ii)
Trading Business.
(iii)
Business of Providing Services.
3-

PROPRIETOR

He is the owner of the business. He invests his capital, gives his time and attention to the
business. He enjoys profit and bear loss of the business.

4-

CAPITAL

The amount with which a business is started or the value of goods with which the owner starts or
expands his business.
Example:
Mr. Ali started business with cash Rs. 1,00,000; Furniture Rs. 20,000 and Building Rs. 3,00,000.
Later on he invests further Rs. 1,00,000 in business. So the total capital of Ali is Rs. 5,20,000.
6GOODS OR MERCHANDISE
The things which are manufactured for selling purpose or bought for reselling purpose are known
as goods or merchandise.
Example:
a.
Cloth is goods or merchandise for a cloth dealer.
b.
Cement is goods or merchandise for a cement dealer.
c.
Furniture is goods or merchandise for a furniture vender.
If these items are manufactured or bought to retain in business or for personal use then these will
not be termed as goods e.g. If Mr. A deals in cars then cars are goods for him. When he purchases
Air conditioner for his office then it will not be termed as goods.
6-

DRAWINGS

Cash or goods taken away by the proprietor from the business for his personal use are called his
drawings.
Example:
Mr. Ali withdrew from business cash Rs. 2000 and goods worth of Rs. 500 for his personal use.
His total drawings are amounted to Rs. 2,500.
7.

PURCHASES

In Accounting purchases does not mean buying of anything but it has special meaning. When
saleable goods or merchandise are bought in a business these are called purchases. Purchases are
of two kinds:
Example:

a. Stationery is purchased by a stationer is called Purchases

b. Cloth purchased by a cloth merchant is called Purchases
c. Cement purchased by a cement dealer is called Purchases
Purchases are of the following two types:
i. Cash Purchases.
ii. Credit Purchases.
i.

CASH PURCHASES

When goods are purchased for immediate cash payment these are called cash purchases.

Example:
If Mr. A purchased goods worth Rs.2,000 on January 1, 2010 and payment is made by him on the
same day then this will be termed as cash purchases.
ii.

CREDIT PURCHASES

If goods are purchased but payment is postponed to a future date then this is called credit
purchases.
Example:
If Mr. A purchases goods worth Rs.3,000 on January 1, 2010 and promises to pay this amount
one month later i.e. 1st February 2010 then this will be termed as credit purchases.
8.

PURCHASES RETURNS OR RETURNS OUTWARDS

If goods purchased are found defective, unsatisfactory or excess in quantity, they are returned to
the supplier, these are called purchases returns or returns outwards.
Example:
Goods of Rs. 500 returned to Taha.
Generally goods are returned due to the following reasons:
(i)
When goods are defective
(ii)
When goods are not according to specification.
(iii)
When goods are damaged.
(iv)
When goods are below standard.
9.

PURCHASES DISCOUNT

The concession allowed by the supplier on the purchase of goods is called purchases discount.
10.

SALES

When the goods purchased for selling purpose are sold to customers at a particular price are
termed as sales. In simple words goods sold are called sales. Sales are of two types:
Example:

i.
ii.
iii.

Cloth sold by a cloth merchant is known as Sales

Cement sold by a cement dealer is known as Sales
Cars sold by a car dealer is known as Sales

Sales are of the following two types:

a. Cash Sales
b. Credit Sales
(a)

Example:

CASH SALES: When goods are sold & cash is received at the same time then this
type of sales are called cash sales.

If Mr. B has sold goods on January 1, 2008 and he received cash at the same time then this will be
termed as cash sales.
(b)

CREDIT SALES

When goods are sold and cash is not received immediately but postponed to a future date then
this is termed as credit sales.
Example:
If January 1, 2010 Mr. C sold goods worth Rs.1,000 and cash is not received but postponed to
Feb. 1, 2010. This will be termed as credit sales.
11-

SALES RETURN OR RETURNS INWARDS

If sold goods are found defective, unsatisfactory or excess in quantity, they are returned by the
buyer, it is called sales return or returns inwards.
Example:
Goods of Rs. 600 returned by Zain.
Generally goods are returned by the customers due to the following reasons:
(i)
When good are defective
(ii)
When good are not according to specification.
(iii)
When goods are damaged.
(iv)
When goods are below standard.
12-

SALES DISCOUNT

The concession allowed by the seller on the sales is called sales discount.
13-

TRADE DISCOUNT

It is a rebate or allowance from the listed price granted by the seller to the buyer at the time of
selling goods.
Example:
If a book the listed price of which is Rs. 350 is sold by the book seller for Rs. 325. Then he has
given trade discount of Rs. 25.
Trade discount is usually granted in the following circumstances:
i.
When goods are sold to a fellow trader.
ii.
When the buyer is an old customer.
iii.
When sales are made in bulk.
iv.
As a custom of trade.
14-

CASH DISCOUNT

It is a rebate or allowance from the amount due granted by the creditor to the debtor at the time
when the debtor makes payment before the due date.
Example:

A sells goods to B of worth Rs.5,000. B agrees to pay the amount within 1 month. If B makes
payment before 10 days then A will give him 5% discount. This type of discount is termed as cash
discount.
15-

DEBTORS

The persons to whom the goods have been sold on credit and from whom the amount is
receivable are called Debtors. Debtors are also termed as Accounts Receivable.
Example:
Ali Sold goods to Imran on credit for Rs. 500, Imran is a Debtor of Ali.
16-

CREDITORS

The persons from whom the goods are purchased on credit and to whom the amount is payable
are called creditors. Creditors are also termed as Accounts Payable.
Example:
Ali Sold goods to Imran on credit for Rs. 500, Ali is a Creditor of Imran
17-

ASSETS

Those valuable things which are possessed by the business are called assets. OR
Assets are economic resources which are owned by a business and are expected to benefit future
operations. OR
Properties, things and receivables having certain value owned by business are called assets.
Example:
Land, Building, Furniture, Accounts Receivable, Good will etc.
18-

LIABILITIES

Those obligations or debts which are payable by business to its owner and others are called
liabilities.
Example:
Creditors, Loan, Capital etc.
19-

COMMISSION

It is the remuneration for the services rendered by one person to another.

Example:
Amount paid to a commission agent.
20-

INCOME OR REVENUE

The price received by a business against goods sold or services rendered to customers is known
as income or revenue. OR
Revenue is the price of goods sold and services rendered during a given accounting period.
Example:
Sales. Commission earned etc.

21-

EXPENDITURE

Expenditure takes place when amount is spent to acquire an asset, the benefit of which will
remain for many years.
Example:
22-

Amount spent to purchase Building, Furniture, Plant etc.

EXPENSE

The cost of doing business is called expenses. These include the routine expenses like salaries,
commission, utility bills etc. OR
Expenses are the cost of the goods and services used up in the process of earning revenue. OR
An expenditure, whose benefit is finished or enjoyed immediately or within the period of one
accounting year, is called expense.
Example:
Salaries, Rent, Stationery etc.
23-

ACCOUNT

A summarized record of all transactions relating to a particular person or thing is called an

account.
Example:
Building Account, Plant Account, Salaries Account, Rent Account etc.
24-

ACCOUNTING PERIOD

The length time for which separate business records (financial statements) are prepared is called
accounting period. Accounting period vary according to the nature of business. It may consist of 3
months or 6 months but, normally accounting period consists of 1 year.
Example:
If accounting records of a business concern are maintained from January to December, it is an
Accounting Period of that business.
25-

VOUCHER

Written evidence in support of a business transaction is called voucher.

26-

CASH MEMO

It is a document issued by a seller to the buyer when goods are sold for cash.
27-

INVOICE

It is a document issued by a seller to the buyer when the goods are sold on credit.
28-

STOCK OR INVENTORY

The goods which remain unsold at the end of a day, month or year are called stock. It may also be
termed as stock-in trade or inventory.

29-

NET INCOME OR NET PROFIT

The income after deducting all expenses is known as Net Income. We can also show this by an
equation.
Net Profit = Total Revenues Total Expenses
30-

SOURCE DOCUMENT

An accounting entry is based on some document. This document is known as source document.
Source Documents include the followings:

1.
2.
3.
4.
5.

Sales Order
Purchase Order
Invoices and Credit Notes
Petty Cash Voucher
Credit Card Sales Voucher

31- BRANCHES OF ACCOUNTING:

1- FINANCIAL ACCOUNTING
Financial accounting helps in determining the true financial results of a business. It
provides helpful information to various users of the business who even dont play active
part in business.

2-

COST ACCOUNTING
Cost accounting is used to calculate the cost of a unit purchased. It also helps in
measuring & controlling costs to increase the profits. The data of cost accounting in
generated through managerial accounting.

3-

MANAGEMENT ACCOUNT
Management accounting is basically related with providing useful information for
decision making for the management in dealing various issues.

32- ACCOUNTING PRINCIPLES:

1- Define the Dual Aspect Concept?

Dual aspect means that every transaction has two aspects one is debit and other
is credit.
2- Define Accounting Period Concept?
Accounting period means a period which is a sum of months after which
business transactions are interpreted to know the financial result of the business.

3- Define the Matching Concept?

The matching concept means that all expenses will be set off against the
revenues carried during the year.
4- Define Realization Concept?
The realization concept means the revenue will be recognized as a result of when
sale of goods or services. When the buyer is liable to pay the certain amount.
5- Define the Business Entity Concept?
Business entity means that business is a separate entity from its owner, business
has his own debts and properties from its owner.
6- Define the Going Concern Concept?
Going concern means that business will continue and there is no intention to
liquidate it in near future.
7- Define the Money Measurement Concept?
Money measurable concept means only those transactions will be recorded
which can be measured in terms of money.

Non-monetary events are not

considered here.
8- Define the Cost Concept?
It means that all assets will be shown at a price to acquire it or at a price which is
paid to purchase it.