Chapter-2 Accounting Terms

1. Entity: An entity means an economic unit which performs economic activities. It

may be business entity or non business entity.
2. Business Transaction: A Business transaction is an economic activity of
business made by two parties that changes its financial position. It has a financial
value and supported by source documents. It has dual aspect.
3. Account: It is a record of all business transactions under a particular head of
accounts. It is a T Shaped Performa.
4. Capital: It refers to the amount invested by the owner in a business either at
the time of commencement or during continuance of business. The amount
invested could be in the form of cash, goods, assets etc. It is a liability of the firm
towards the proprietor due separate entity concept.
It is also known as Owner’s Equity or Net worth.
Capital= Assets - Liabilities
5. Drawing: Any cash, goods or assets withdrawn by the owner from business for his
personal use are known as drawings. It reduces the capital of owner.
6. Profit: It is the excess of total revenue over total expense/ cost of a business. Profit
is further divided into Gross Profit of Net profit. Net profit increases capital.
Profit =Revenue-Expenses.
7. Loss: The excess of expenses over related revenue is known as loss. Net loss
decreases the capital.
Loss= Expenses-Revenue.
8. Gain: It is a monetary benefit resulting from events or transactions which are
incidental to business like profit on sale of fixed assets. These transactions are
irregular or non-recurring in nature and are not related to operating activity.
9. Stock: It includes goods unsold on a particular date. It is also known as inventory.
It may be opening sock (at the beginning of accounting year) and closing stock (at
the end of accounting year)
In manufacturing concern it may be of three kinds
i) Stock of Raw Material
ii) Stock of Work in process
iii) Stock of Finished Goods
10. Purchases: It refers to the amount of goods bought by business for resale or use
in production. it can be of cash or credit.
11. Purchase return: When purchased goods are returned to suppliers, it is
referred to as purchase return. It is also known as Return Outward.
12. Sales: It means transfer of goods or services for money in the normal course of
business. It includes both cash and credit sale.
13. Sales return: When customers return the goods sold to them it is known as sales
returns. It is also known as Return Inward.
14. Debtors: It refers to those persons to whom business has been sold goods on
credit and payment has not been received yet.
15. Creditors: It refers to those persons from whom business has bought goods on
credit and payment has not been done yet.
16. Voucher: A voucher is a written document which is created in support of a
particular transaction. It is evidence of transaction having taken place. It may be in
the form of a cash memo, invoice or receipt. Voucher is a necessary component of
 auditing. It is of two types Source Voucher and Accounting Vouchers.
17. Income: It refers to the money earned by an individual or business through
various sources, included wages, rent, interest on investments etc. during a
particular accounting period.
18. Accrued Income: Any income which has earned by business but not received yet
up to end of an accounting year. It is asset of the business.
19. Unaccrued Income: Any income which is received in advanced but earned or
become due till end of an accounting year. It is liability of the business.
20. Expense: It is the amount used in order to produce and sell goods and services.
So it is the cost incurred for earning revenue.
21. Outstanding Expense: Any expense which has been due/ incurred but not paid
till end of an accounting year. It is the liability of a business.
22. Prepaid expense: Any expense which has been paid in advance but not become
due till end of an accounting year. It is asset of the business.
23. Discount: It is the reduction in the price of goods allowed by the seller to the
buyer. It is of 2 types: Cash Discount and Trade Discount.
24. Cash Discount: When discount is allowed to customers for making prompt
payment or timely payment. It is always recorded in books of accounts.
25. Trade Discount: This is a type of discount allowed by the sellers to their
customers at a fixed percentage on the list price of goods. It is not entered in the
books of accounts. Sale or purchases are recorded at Net value.
26. Rebate: Rebate is the discount allowed by the seller to buyer due to poor quality
or some defect in goods.
27. Bad Debts: It refers to that amount due on debtors, which becomes irrecoverable
due to his death, insolvency, financial weakness etc. It is loss of the business.
28. Depreciation: It is the reduction in the value of fixed assets due to its regular use,
wear& tear, obsolescence, efflux of time etc.
29. Expenditure: It involves spending cash or incurring a liability for the purpose
of acquiring assets, goods or services. It is of 3 types.
1. Revenue Expenditure: It refers to any expenditure, the full benefit of which is
received during one accounting period. ex- salaries, rent.
2. Capital Expenditure: It refers to expenditure, the benefit of which is received
during more than one year. Ex- Machinery.
3. Deferred Revenue Expenditure: It refers to expenditure which are revenue in
nature but benefit of which is likely to be derived over no of years. Example-
Advertisement.
30. Goods: It refers to the products in which the business unit is dealing, i.e. in terms
of which it is buying and selling or producing and selling. The items that are
purchased for use in the business are not called goods like furniture, machines etc.
31. Assets: Assets are the properties owned by a business entity. They are the
economic resources of the business. Anything which enables the firm to get
economic benefit in the future is an asset.

a) Non current assets: Those assets which are held by an entity or enterprise not
with the purpose to resell but held either as investment or to facilitate business
operations.
b) Tangible Assets: Tangible assets are those assets which have physical
existence mean they can be seen and touched. Like building, furniture
c) Intangible Assets: Intangible assets are those assets which have no physical
 existence mean they cannot be seen and touched. Like Goodwill, Patent,
copyright etc
d) Current Assets: Those assets which are held by any entity with the purpose of
converting into cash within a short period i.e. one year.
e) Fictitious Assets: Those assets which are neither tangible assets no intangible
assets. They are expenditures/ losses not written off in the year in which they
are incurred but related to more than one year. These are also known as
Deferred Revenue Expenditures. e.g. Advertisements.

32. Liabilities: Liabilities refers to financial obligations of business. It denotes the

amount which a business owes to others. ex- Creditors, loan, etc. It is of 2 types;
1. Non-current liabilities: It refers to those which are payable after a period of 12
months from the end of accounting year. For ex- long term loans.
2. Current liabilities: It refers to those which are to be paid in the near future,
means within 12 months from the end of accounting year. Ex-Creditors,
Outstanding expenses.

Systems of accounting:
There are following two systems of recording transactions in the books of accounts:
1) Double Entry System 2) Single Entry System

Double-entry system
 The double entry system is based on the Dual Aspect Principle of accounting.
 Every transaction has two aspects, ‘a Debit’ and ‘a credit’ of an equal amount.
 This system of accounting recognises and records both aspects of the transaction.
Features of Double-entry system
i) It maintains a complete record of each transaction
ii) It recognise two fold aspect of every transaction
iii) In this system one aspect is debited and the other aspect is credited following the rule of
Debit and Credit.
iv) Total of all debit is always equal to total of all credits.

Advantages of the Double-entry System of Accounting

Following are the main advantages of the double-entry system of accounting:
a) Scientific system: As compared to the other systems, this system of recording
transactions is more scientific and useful to achieve the objective of accounting.
b) A complete record of the transaction: Since both the aspects of transactions are
considered there is a complete recording of each and every transaction. Using these
records we are able to compute profit or loss easily.
c) Checks arithmetical accuracy of accounts: Under this system, by preparing a Trial
Balance we are able to check the arithmetical accuracy of the records.
d) Determination of profit/loss and depiction of financial position
 Under this system by preparing ‘Profit & Loss A/c’ we get to know about the profit earned or
loss incurred.
 By preparing the ‘Balance Sheet’ the financial position of the business can be ascertained, i.e.
position of assets and liabilities is depicted.
e) Helpful in decision making: Administration and management are able to take decisions
on the basis of factual information under the double-entry system of accounting.

Single entry system

 Under this system, both aspects are not recorded for all the transactions.
 Either only one aspect is recorded or both the aspects are not recorded for all the transactions.