2. Basic Terms in Accountancy - 1

8/9/2019 2. Basic Terms in Accountancy - 1

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Basic Terms in Accountancy

Accounting:

The art of scientifically

classifying, summarizing andrecording the transactions of an

enterprise and interpreting theresults thereof.


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Accountancy:Set of rules, principles,

techniques and formats which

enable the analyzing andrecording the transactions

uniformly.


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Goods:Commodities in which a traderCommodities in which a trader

deals are called as goods. Thisdeals are called as goods. Thisis a relative term. Goods for oneis a relative term. Goods for one

trader can be asset for the other.trader can be asset for the other.


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Stock:Goods unsold lying with the business

on any given date is called stock. In a

manufacturing concern, there may bethree types of stock stock of raw

materials, stock of work in process,

stock of finished goods.


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Capital:The total amount invested in

business by the owner of the

business. In the accounting

sense, capital is the excess of

assets over liabilities. Capital =Assets Liabilities.


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Drawings:

The amount withdrawn by a trader fromhis business to meet his personal

expenses. Even goods or any other

thing withdrawn by the owner forpersonal purpose are also known as

drawings.


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Assets:Any kind of property owned by the

business is known as asset; such

as; land, building, plant, furniture,

machinery, cash, goodwill, etc.


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Depreciation:An invisible loss in the value of

fixed assets due to wear and tear

and also due to time impact. Dueto depreciation, the value of the

fixed assets decreases year byyear.


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Liabilities:All the payable amounts of the

business are liabilities. Debts

owed by a trader are calledliabilities; such as bank loan, bank

overdraft, outstanding wages oroutstanding rent, etc.


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Debts and Debtors:Debts arise when goods are sold on

credit basis. Amounts receivable from

credit customers are called as debts.The customers to whom goods are sold

on credit basis are known as Debtors.


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On Accounts:

Amount received or paid as part

payment of the total dues is called

as on accounts.


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Insolvent:

A person whose liabilities are

more than his assets. He is

unable to pay his liabilities fully.


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Prepaid Expenses or Incomes

Received in Advance:

It is the amount of expenses paid

or incomes received in advance.Amounts are received or paidagainst which goods or services

are not supplied or received yet.


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Outstanding:

It is the amount of expenses

payable or incomes receivable.

Goods or services are receivedfor which amount is not paid yet.


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Bad Debts:

Debts which are irrecoverable and

written off from Debtors Account

as a loss are termed as BadDebts.


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Creditors:

A creditor is a person to whom our

business owes something.

Creditors are those suppliers fromwhom our business purchases

goods on credit basis.


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Double Entry System

Definition:

Double entry system is a systemDouble entry system is a system

which enables to record, analyzewhich enables to record, analyzeand interpret all the monetaryand interpret all the monetary

transactions, related to thetransactions, related to the

business, in the books ofbusiness, in the books of

accounts.accounts.


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Ledger Accounts

Ledger:Transactions are recorded in the journal firstand then they are posted into the ledger inrespective accounts. Ledger is prepared oncompletion of journal entries.

A group of accounts is known as ledger.

The ledger includes all the basic accountsneeded for the preparation of the financialstatements. Therefore the ledger is divided into

four types Debtors Ledger, Creditors Ledger,General Ledger and Personal (Proprietors)Ledger.


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Trial Balance

Definition:

A Trial Balance is a statement or list of debit

and credit balances of all the ledger accounts as

on a given date.Before preparing a Trial Balance all ledger

accounts must be totaled or balanced. A Trial

Balance is prepared in two ways, either taking

totals of all the ledger accounts or considering

their balances.


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Journal and Ledger

Journal:

The word journal is derived from the Frenchwork jour which means a day. Journal,therefore, means daily record.

Journal is a book of original entry orprimary entry.

Every transaction is first recorded in thejournal from which it is posted in the ledger.

Journalizing means recording a transaction inthe journal and the form in which it is recorded iscalled a journal entry.

2. Basic Terms in Accountancy - 1

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