Question

Explain the basic terms used in accounting.

Answer 1

1. Capital: The money or assets invested by the owner in the business. It represents the owner’s claim on the firm.
   Capital = Assets – Liabilities.
2. Liability: The amount owed by a business to outsiders, such as creditors, loans, or bills payable.
3. Asset: Anything owned by the business that has monetary value. Examples: land, buildings, machinery, cash.
   • Fixed Assets: Long-term use (land, machinery).
   • Current Assets: Easily convertible into cash (stock, debtors, cash).
   • Tangible Assets: Physical existence (plant, furniture).
   • Intangible Assets: No physical existence (goodwill, patents).
4. Revenue: The income earned from sales of goods, services, or other sources like rent and interest.
5. Expenses: The costs incurred in earning revenue, such as rent, salaries, and electricity.
6. Purchases: Goods bought by the firm for resale.
7. Sales: Goods sold to customers, either for cash or on credit.
8. Stock (Inventory): The goods unsold at a given date. It includes raw materials, semi-finished goods, and finished goods.
9. Debtors: Persons or firms who owe money to the business because they purchased goods on credit.
10. Creditors: Persons or firms to whom the business owes money for goods purchased on credit.
11. Net Profit/Net Income: The excess of revenue over expenses in a given period.
12. Net Loss: The excess of expenses over revenue.
13. Drawings: The money or goods withdrawn by the owner for personal use.
14. Discount: A reduction in price given to customers.
15. Trade Discount: Deduction on printed price.
16. Cash Discount: Deduction for making prompt payment.
17. Transaction: Any event involving transfer of money or money’s worth, e.g., purchase or sale.
18. Entry: The record made in the books of accounts for a transaction.
19. Voucher: A document that serves as proof of a business transaction.
20. Reserve: A part of profit set aside for future use or unforeseen expenses.
21. Debit (Dr.): An entry on the left-hand side of an account. It usually represents an increase in assets or expenses.
22. Credit (Cr.): An entry on the right-hand side of an account. It usually represents an increase in liabilities, capital, or income.