Basic Terminologies

Basic Accounting Terms
Transaction profit
Assets
Loss
Liabilities
Debtors (Trade receivables)
Capital
Creditors (Trade payables)
Drawings
Expenses
Capital expenditure
Incomes Revenue expenditure

Transaction
It means an event or a business activity which involves exchange of money or

money’s worth between parties. The event can be measured in terms of
money and changes the financial position of a person.
Transaction could be a cash transaction or credit transaction.
When the parties settle the transaction immediately by making payment in

cash or by cheque, it is called a cash transaction. In credit transaction, the
payment is settled at a future date as per agreement between the parties.
Assets
Assets are the resource owned by the business with the purpose of using it for
generating future profits. The assets can be non-current assets and current
assets.
Non-current assets are the assets which are bought and used in the business for a
longer period of time. Eg. Machinery, computer equipment, building, etc
Current assets are changing its form/ or can be converted to cash within a shorter
period of time. Eg: Inventory, trade receivables, bank balance, cash balance, etc
Assets can be Tangible and Intangible.
Tangible Assets are the Non-current/Capital assets which have some physical
existence. e.g. Plant and Machinery, Furniture and Fittings, Land and Buildings,
Books, Computers, Vehicles, etc.
The capital/ Non-current assets which have no physical existence and whose
value is limited by the rights and anticipated benefits that possession confers
upon the owner are known as intangible Assets. e.g. Goodwill, Patents, Trade-
marks, Copyrights, Brand Equity, Designs, Intellectual Property, etc.
• Liability: Non-current liability and current liability
It is an obligation of financial nature to be settled at a future date. It represents amount
of money that the business owes to the other parties.
Non-current liability: liability to be settled after one year, eg : long-term loan
Current liability: liability due to be paid within a short period of time like one year. Eg:
trade payables, bank overdraft.
(when goods are bought on credit, the firm will create an obligation to pay to the
supplier the price of goods on an agreed future date)
• Capital
It is amount invested in the business by its owners. It may be in the form of cash, goods,
or any other asset which the proprietor or partners of business invest in the business
activity. From business point of view, capital of owners is a liability which is to be settled
only in the event of closure or transfer of the business. Hence, it is not classified as a
normal liability. For corporate bodies, capital is normally represented as share capital.
• Drawings
Withdrawals made by the owner from the business for personal use. It may be in
the form of cash or items.
• Expenses
These are the costs of running the business.
Eg: rent, salaries and wages, electricity, insurance, etc
• Incomes
The benefit or gain derived in monetary terms by running the business.
Eg: sale of goods and service, rent received
• Profit:
The excess of Revenue/ Income over expense is called profit. It could be calculated
for each transaction or for business as a whole.
• Loss
The excess of expense over income is called loss. It could be calculated for each
transaction or for business as a whole.
• Debtor (trade receivables)
The sum total or aggregate of the amounts which the customer owe to
the business for purchasing goods on credit or services rendered or in
respect of other contractual obligations. It is also termed as Trade
receivables. In other words, Debtors are those persons from whom a
business has to recover money on account of goods sold or service
rendered on credit.
• Creditor (trade payables)
A creditor is a person to whom the business owes money or money’s
worth. e.g. money payable to supplier of goods or provider of service.
Creditors are generally classified as Current Liabilities
• Capital Expenditure
This represents expenditure incurred for the purpose of acquiring a fixed
asset (Non-current assets) which is intended to be used over long term
for earning profits there from. e. g. amount paid to buy a computer for
office use is a capital expenditure. At times expenditure may be incurred
for enhancing the production capacity of the machine. This also will be a
capital expenditure. Capital expenditure forms part of the Balance Sheet.
• Revenue expenditure
This represents expenditure incurred to earn revenue of the current
period. The benefits of revenue expenses get exhausted in the year of the
incurrence. e.g. repairs, insurance, salary & wages to employees, travel
etc. The revenue expenditure results in reduction in profit or surplus. It
forms part of the Income statement.
Accounting is the language of business.
The purpose of accounting is to provide the information that is
needed for sound economic decision making.
It is the process of
• Recording, Classifying and Summarising business data
• Analysing and communicating what has been learnt from data
Stakeholder: beneficiaries of business information or users of
accounting information
Owner and management, suppliers, bank, government and tax
authorities, customers
BOOK KEEPING
• Book keeping is the process of recording business

transactions accurately and systematically in
accordance with certain principles or rules.
• A business transaction is the occurrence of an event
which can be expressed in money terms and which
relate to the business.
Steps in recording Process
THE DOUBLE ENTRY SYSTEM
A business transaction involves an exchange between two

accounts.
The double entry system is a system where each transaction
is entered twice, once on the debit side and once on the
credit side.
Eg: Bought machinery by cheque £4000
Machinery increase, debited
Bank balance decrease, credited
Debit entries are ones that account for the following effects:
• Increase in assets
• Increase in expense
• Decrease in liability
• Decrease in equity
• Decrease in income
THE DOUBLE ENTRY SYSTEM
Credit entries are ones that account for the following effects:
• Decrease in assets
• Decrease in expense
• Increase in liability
• Increase in equity
• Increase in income
Asset increase Dr Asset decrease Cr
Expense increase Dr Expense decrease Cr
Liabilities increase Cr Liabilities decrease Dr
Capital increase Cr Capital decrease Dr
Incomes increase Cr Income decrease Dr

Types of Books of Original Entry (Journal): the book in which the first entry of a transaction is made
The most commonly used books of original entry are:

• Sales day book (Sales journal) – used for recording only credit sales
• Purchases day book (Purchases journal) – used for recording only
credit purchases
• Return inwards day book (Return inwards journal/sales returns
journal) – used for return inwards
• Return outwards day book (Return outwards journal/purchases
returns) – used for return outwards
• Cash book – for receipts and payments of cash and cheques
• General journal – for other items
Types of Ledgers
The different types of ledgers most businesses use are:

• Sales ledger: this is for individual customer’s personal
accounts.
• Purchases ledger: this is for individual supplier’s
personal accounts.
• General ledger: this contains the remaining double
entry accounts, such as those relating to expenses,
non-current assets etc.
Types of Accounts
• Accounts are mainly divided into personal accounts and

impersonal accounts.
• Personal Accounts – these are for debtors and creditors (i.e.
customers and suppliers).
• Impersonal Accounts – divided between ‘real’ accounts and
‘nominal’ accounts:
• Real Accounts – accounts in which possessions are recorded.
Examples are buildings, machinery, fixtures and stock.
• Nominal Accounts – accounts in which expenses, income and
capital are recorded.
Exercise:1
Record the following transactions in ledger accounts. Balance the accounts at the end of the month and prepare a trial balance at 31 August.
Aug 1 Balances: Cash £200, Fixtures and fittings £1 100, Motor vehicles £5 200
3 A loan of £1,000 cash is received from Sam
5 Bought office fixtures for cash £400
9 Credit purchases from Yang Brothers £700
13 Cash purchases £500
15 Cash sales £800
18 Credit sales to Wenfa £550
20 Wenfa returned some of the goods that are of the wrong specification £100
24 Paid for carriage on purchases £100
26 Paid Yang Brothers cash for part settlement of account £400
28 Wenfa paid the amount owing by cash
30 Repaid part of the loan from Sam by cash £500

Basic Terminologies

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Basic Terminologies

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Basic Accounting Terms

Incomes Revenue expenditure

It means an event or a business activity which involves exchange of money or

Transaction could be a cash transaction or credit transaction.

When the parties settle the transaction immediately by making payment in

• Book keeping is the process of recording business

A business transaction involves an exchange between two

Expense increase Dr Expense decrease Cr

Liabilities increase Cr Liabilities decrease Dr

Capital increase Cr Capital decrease Dr

Incomes increase Cr Income decrease Dr

The most commonly used books of original entry are:

The different types of ledgers most businesses use are:

• Accounts are mainly divided into personal accounts and

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