Basic Terms used in Accounting - Part 1

In earlier post we have learnt about meaning and process of Accounting. Here we will see basic terms used in accounting. In accounting, many technical words are commonly used. Therefore, it is essential to know their meaning, without which knowledge of accounting subject will be incomplete. Commonly used terms such as business, entity, asset etc are explained here.
  • Business
  • Transaction
  • Capital
  • Share
  • Asset
  • Liability
  • Equity
  • Entity
  • Purchases
  • Sales
  • Debtors
  • Creditors
  • Journal
  • ledger 
  • Entry
  • Narration
  • voucher
  • Profit
  • Loss
Business: Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply , it is "any activity or enterprise entered into for profit. It does not mean it is a company, a corporation, partnership, or have any such formal organization.
Accounting Terms

Transaction: It is transfer of Goods from one person to another or one person's account to another. These can be cash transaction, credit transaction or paper transaction.
  • In cash transaction Cash is paid or received immediately.
  • In credit transaction promise is made to receive or give cash in future date.
  • In paper transaction no cash outflow or inflow is done all the transactions are settled in Paper's such as bad debts of previous year written off..

Capital: Funds brought into start a business by owner is called capital. In case of company capital is collected by Issue of Shares. It might be brought in the form of cash or assets by the owner for the business entity capital. 

Share: A share in a company is one of the units into which the company capital is divided.

Asset: It is a resource legally owned by the owned by the enterprise as an result of past events. this can be that can be owned or controlled to produce value and that is held by an economic entity and that could produce positive economic value. Simply, assets represent value of ownership that can be converted into cash.

Liability: It is an obligation of an enterprise  that arise from the past event. for example Loan payable, salaries payable etc..

Equity: It is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of an asset. For example, if Mr. A owns a car worth 9,000 and owes 3,000 on the loan used to buy the car, then the difference of 6,000 is equity. It is applicable for a single asset.

Entity: It is an economic unit that perform from economic activity.

Purchase: Goods which are bought for resale are called purchases. This might be in the form of raw material or in the form of finished goods. 

Sales: Goods sold by business are called sales.

Debtors: A debtor is a person who owes money to the business. Therefore, the individual, firm or an association who owes cash or Money’s worth to the business is known as a debtor.

 Creditor: A creditor is a person to whom the business owes money.

Journal: It is a daily record of transactions. It is also known as book of prime/ original entry. In these transactions are recorded in specified manner in order of dates.
Ledger:  It is a book containing accounts to which debits and credits are posted from books of original entry. 

Entry : It is record of transactions made in books of accounts. It can be either in book of original entry or Final books.

Narration : It is brief explanation of any transaction. Generally narration are given during Journal entry.

voucher : It is a document which acts as an evidence of transaction.

Profit : The  money that is earned in trade or business after paying the costs of producing and selling goods. For example Mr. A purchased a Book for Rs 10 and sold the same for Rs 8. The difference is the profit.

Loss : An amount of money lost by a business or organization. For example Loss of cash by Theft, Loss of goods by fire or Damage etc..

To be continued..

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