Understanding of Various Accounting Terms

Accounting Terms

Transaction

A transaction is an event involving the exchange of value between entities. Examples include purchasing supplies, receiving money, paying a supplier, or incurring expenses. Transactions can be cash or credit-based.

Purchases

Purchases refer to goods acquired for resale or for producing finished products intended for sale. Goods can be purchased either with cash or on credit, and total purchases comprise both cash and credit purchases.

Sundry Creditors

Sundry creditors are individuals or entities to whom a business owes money for goods or services received on credit.

Sales

Sales represent the total revenue from goods or services provided to customers. Sales can occur as cash transactions or on credit.

Sundry Debtors

Sundry debtors are individuals or entities that owe money to a business for goods sold or services rendered on credit. This is also referred to as debtors, trade debtors, or accounts receivable.

Revenue

Revenue from sales is the income generated from selling products or providing services to customers. Other revenue items can include commissions, interest, dividends, royalties, and rent received.

Expenses

Expenses are the costs incurred by a business to generate revenue. They are measured by the cost of assets consumed or services used during an accounting period. Common expenses include depreciation, rent, wages, salaries, interest, heating, lighting, water, and telephone costs.

Income

Income is the difference between revenue and expenses.

Income=Revenue−Expense

Gain

Gain refers to an irregular profit, such as a capital gain.

Loss

A loss occurs when the firm receives no benefit from an event, such as in the case of theft. Unlike expenses, which help generate revenue, losses do not.

Profit

Profit is the excess of revenue over costs. Gross profit is the difference between sales revenue and the direct cost of goods sold, while net profit is the profit after accounting for all expenses. A net loss occurs when expenses exceed revenue.

Expenditure

Expenditure involves spending money or incurring liabilities to receive some benefit, service, or property. Examples include paying rent, salaries, or purchasing machinery. Expenditure lasting more than a year is capital expenditure, while that lasting less than a year is revenue expenditure. Expenditure generally enhances the profit-earning capacity of the business, whereas expenses are incurred to generate revenue.

Drawings

Drawings refer to the amount of money or value of goods taken by the proprietor from the business for personal use.

Capital

Capital is the amount invested in an enterprise by its owners, such as paid-up share capital in a corporation. It represents the owners' interest in the assets of the enterprise and is considered a liability for the business. Capital can be contributed in the form of cash or assets.

Assets

Assets are tangible or intangible items owned by an enterprise that provide future benefits. Tangible assets include items like furniture and machinery, while intangible assets include patents, copyrights, and goodwill. Assets are categorized as current (held for a short period, generally within a year) and non-current or fixed (held for long-term use in the business).

Liability

Liability is a financial obligation of an enterprise to entities other than its owners. Liabilities, or debts owed to creditors, can be classified as long-term (payable after more than a year) or short-term/current (payable within a year). Examples include creditors, bank overdrafts, and bills payable.

Account

An account is a summarized record of relevant transactions related to a particular category, capturing the amount, effect, and direction of those transactions.

Stock or Inventory

Stock refers to tangible property held for sale in the ordinary course of business or for use in production. It includes raw materials, work-in-progress, and finished goods. Stock can be classified as opening stock (at the beginning of the accounting period) and closing stock (at the end of the accounting period).

Goods

Goods are items held for sale or used in production, forming part of an enterprise's stock-in-trade. For example, home appliances for a retailer or stationery for a stationer.

Receivables

Receivables include outstanding amounts due from others, such as trade debtors, bills receivable, and promissory notes receivable.

Payables

Payables include amounts due to others, such as trade creditors, bills payable, and promissory notes payable.

Bill Receivable

A bill receivable is a bill of exchange accepted by a debtor, indicating an amount to be received on a specified date.

Bill Payable

A bill payable is a bill of exchange indicating an amount to be paid on a specified date.

Event

An event in an organization refers to any transaction with documentary evidence that affects revenue, expense, assets, liabilities, or capital.

Cost

Cost is the amount of expenditure incurred on or attributed to a specific item, product, or activity.

Voucher

A voucher is proof of a business transaction, such as a cash memo, bill/invoice, or credit/debit note.

Discount

A discount is a reduction in the price of goods allowed by a business to customers.

Trade Discount

A trade discount is a reduction given by the seller to the buyer at the time of sale on the list price of goods, often for bulk purchases. It is usually deducted from the list price and not shown in the accounting records.

Cash Discount

A cash discount is a deduction allowed by a creditor to a debtor on the amount due if paid within a stipulated period. It encourages prompt settlement of accounts. For the debtor, it is an income, and for the creditor, it is an expense.

We have learned the basics of accounting, including the key differences between bookkeeping and accounting, the objectives of accounting, and how it serves as a valuable source of information for its users. We also seen the fundamental and qualitative characteristics needed for accounting information to be effective, and we discussed essential accounting terms to understand accounts better.

Now, to gain practical understanding, we need to explore Accounting Concepts for classifying transactions, bookkeeping, and maintaining books of accounts.

Stay tuned for our next article to learn more about Accounting Concepts in detail.