Basic Terminologies of Accounting

Basic Terminologies Of Accounting
BY: SAJJAD AHMAD

MBA (FINANCE)
MSC. ECONOMICS
What is Business ?
2
 Any legal activity undertaken for the purpose of

earning profit is called business. Such as buying
and selling goods , rendering services or
manufacturing goods.
 Types of businesses.
1. Merchandising or trading concerns business.
2. Services concern Business
3. Manufacturing concern Business
Merchandising or trading concerns
business.
3
A business engaged in buying and selling of goods or

merchandise is called merchandising or trading
concern business.
Examples:
 Grocery shop
 Stationary shop
 Medicine shop etc

What is meant by Merchandise?
4
Any thing purchased by a business for the purpose of

reselling them in the same condition is called
merchandise.
Examples.
 In stationary shop stationary is merchandise.
 In medicine shop medicine is merchandise. etc etc
Services Concern Business
5
A business engaged in providing any type of service is

called services concern business.
Examples. Hospitals ,Educational institutes, Barber shop
etc
Manufacturing Concern Business
6
The business engaged in manufacturing goods is called

manufacturing concern business.
Examples.
 Carpenter shop
 Factories etc
Assets
7
Whatever business possesses which have to give future

economic benefits are called asset
OR
All valuables possessed by a business are called assets.
For Example land, building, furniture, car etc
Liabilities
8
The claim of the external parties on the assets of the

business is called Liabilities
For Example Loan payable, Rent payable, Salaries
payable etc.
Owner Equity
9
 It is the amount invested by the owner of the business.

OR
The residual claim of the owner on the assets of the business is
called owner equity.
Example of assets liabilities and owner’s equity
10
If a vegetable shop has total value of assets equal to

$1000 and owner invest $600 from his own pocket and
the remaining $400 he acquire from his friend who is not
owner of the business and invest in the business.
So here $1000 is the value of the assets of business $400
is the liability and $600 is owner equity’s.
Accounting Equation
11
ASSETS = LIABILITIES + OWNER EQUITY’S

$1000 = $400 + $600
This “assets = liabilities + owner equity’s” is called
accounting equation.
Revenue
12
 The price of goods sold or services rendered is called revenue.

 For Example If business sell 1000 pens @ 5 per pen then 5*1000=
5000 is its revenue.
 If 20 patient comes to a Doctor and he charge 200 fee from every
patient then 20 * 200 =4000 is its revenue.
Expenses
13
 The cost of doing business is called expense.

OR
 The cost of goods and services used up in the process of earning
revenue is called expense.
 Examples. salaries, utility bills etc
Profit
14
The excess amount of revenue over the expense of a

business is called Profit.
For Example if a revenue is $ 100 and expense is $ 80
then profit is $ 20.
Loss
15
The excess amount of expenses over the revenue of a

business is called loss.
Example. If revenue is $100 and expenses are $130 then
$30 is loss.
Investors
16
Individual and other businesses that own the business

are investors.
These are owners.
Creditors
17
Individual and others business that provide loan or other

things to the business are called Creditors. These are not
owners.
The parties to whom liabilities are payable are called
creditors
For example Commercial Banks, suppliers etc
Transactions
18
Any dealing between two or more person for goods and

services which effect the financial position of a business
and also can be measured in terms of money is called
business transactions.
For Example
Business purchased land for $52,000 and pay cash for it.
Here business is receiving land which is an asset but for
acquiring one asset it gives another asset cash and
amount of transaction is $52,000.
Types of Transactions
19
There are two types of Transactions

 Cash Transactions
 Credit Transactions
Cash Transactions
20
The transaction where immediate cash collection or

payments is involved is called cash transaction.
For Example
Owner invest $80,000 in business.
Business pay $200 salary to an employee.
Credit Transaction.
21
The transaction where cash collection or payments are made at

some future time is called credit transaction.
Examples.
1.The business sells merchandise of price $400 and the amount
will be received after 15 days.
2.The business purchased computer at $300 and promise that
amount will be paid after 20 days.
Cash inflow or Positive cash flow.
22
These are Cash collection of a business from any source .

If owner invest money , creditor gives loan ,business generate
revenue from all these activities business received cash so this is
called positive cash flow or cash inflow.
Cash outflow or negative cash flow
23
These are Cash payments of a business to any party.

If business pay expenses , repay loans to creditors , owner take
money from business. Business purchased any assets for
business in all these activities business is paying cash so it is
called negative cash flow or cash outflow
Accounting period.
24
The time period for which a business measures its profit and loss is
called accounting period.
OR
The period of time covered by an income statement of a business is
called accounting period.
If a business measure its revenue and expenses for 3 months its
accounting period will be 3 months.
If a business measure its revenue and expenses for one year then
its accounting period will be one year.
Accounting period of one year of a business is called fiscal year.
End of Accounting Basic Necessary Terminologies
25

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Basic Terminologies Of Accounting

BY: SAJJAD AHMAD

 Any legal activity undertaken for the purpose of

A business engaged in buying and selling of goods or

 Medicine shop etc

Any thing purchased by a business for the purpose of

A business engaged in providing any type of service is

The business engaged in manufacturing goods is called

Whatever business possesses which have to give future

The claim of the external parties on the assets of the

 It is the amount invested by the owner of the business.

If a vegetable shop has total value of assets equal to

ASSETS = LIABILITIES + OWNER EQUITY’S

 The price of goods sold or services rendered is called revenue.

 The cost of doing business is called expense.

The excess amount of revenue over the expense of a

The excess amount of expenses over the revenue of a

Individual and other businesses that own the business

Individual and others business that provide loan or other

Any dealing between two or more person for goods and

There are two types of Transactions

The transaction where immediate cash collection or

The transaction where cash collection or payments are made at

These are Cash collection of a business from any source .

These are Cash payments of a business to any party.

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