IMPORTANT CONCEPTS AND DEFINITIONS IN ACCOUNTANCY

IMPORTANT CONCEPTS

AND
DEFINITIONS IN ACCOUNTANCY

Book keeping

Let us learn through an example

A customer buys some groceries from a grocer. He receives a bill against that transaction. He keeps this record for future reference.

The grocer also keeps the record of goods sold and money received on that date.

Here, we can see that both the customer as well as the shop keeper are keeping the record.

There are so many bills or invoices which are received and paid every month, such as electricity bill, water bill, petrol bill, property tax bill, salary slips, etc. which are filed and kept as a record for further references.

Thus ‘keeping of record’ is called as ‘book keeping’.

Let's take another example -  A business or a  firm buys raw material, assets and incurs various expenses. It also sells the finished goods. For all the transactions separate bills or invoices are generated. These bills are kept as a record. Similarly the amount paid or received is also recorded in some books. This way of keeping a record is called as ‘book keeping’. The recording is done in a systematic way.

Therefore we can conclude as :

'Book-keeping is a system of recording business transactions having money value, in the books of accounts'.

According to R.N. Carter, "Book-keeping is the science and art of correctly recording in the books of accounts, all those business transactions that result in the transfer of money or money's worth.

Thus we can say that -

Book keeping is a systematic record.

It contains only monetary transactions.

It has a system of recording which means there is a scientific method. 

It is recorded in a set of books.

In book-keeping there are some rules and principles to be followed which are universal, so it is called as a science.

Similarly there is an efficient and attractive way of maintaining records, so it is also called as an art. 

 

Objectives of book keeping are :

1. To know the profit or loss of the business annually. 

2. To know the financial position of the business on a particular date.

3. To know the solvency of the business to the creditors and money lenders of the business.

4. To act as a proof in the court of law in case of dispute with third parties.

5. To help management in future planning. 

6. To know the liquidity of the business.

 

Accounting :

Accounting is identifying, measuring, recording, classifying, summarising, analysing, interpreting and communicating the financial data of the business through financial statements to it’s end users.

 

Accountancy :

It is the subject in which one learns the procedure of accounting by applying some principles and rules of accounts.

 

Account

An Account is summary of business transaction relating to person, thing, goods, or services. 

An account has two sides viz debit side and credit side. The left hand side is called debit side and the right hand side is called credit side.

An account refers to the recording of assets, liabilities, incomes, gains, expenditures and losses.

Format of an account

ACCOUNT

Date	Particulars	LF	Amount	Date	Particulars	LF	Amount

 

 

Goods

Any article produced or bought for selling purpose is called goods.

An article or product in which the trader deals is called goods.

 

For example : A manufacturer buys raw materials and produces some finished product to sell.

Here, both the raw material as well as the finished product are called as goods.

 

Goods are divided into 4 types

 

1) Purchases - When raw materials are bought in a company either in cash or on credit is called as 'Purchase'

 

2) Sales - When finished goods are sold by the company either on cash or credit basis it is called as 'Sales'

 

3) Purchase Return - When raw material are returned to the suppliers it is called as Purchase Return. The other word used for 'Purchase Return' is 'Return Outward' 

 

4) Sales Return - When finished goods are returned by the customers it is called as Sales Return. The other word used for 'Sales Return' is 'Return Inward' 

 

Asset

Anything bought for the business but is not for sale, is called as an asset. In other words asset is the property of the business.

 

For example : Machinery, Building, Cash, Furniture, Stock of goods, etc.

'All goods are assets but not all assets are goods.'

 

Income

Any amount received in cash or kind is called an income. In other words, cost of anything when received is called an income.

For example : Sales of goods, Commission received, Rent received, interest received, etc.

 

Gain / Profit

Suppose goods are bought at Rs.500 and sold for Rs.700. Here the selling price is more than the buying price. It is said to be profit.

 

'When the selling price is more than the cost of any product or service, it is called as profit or gain.'

 

Expense

Payment made in cash or kind is called an expense. In other words, cost of a thing when paid is called an expense.

For example : Salaries paid, Wages paid, Travelling expenses paid, raw material purchased, coal & fuel, rent paid, interest paid etc.

 

Loss

Suppose goods are bought at Rs.1,000 and sold for Rs.900. Here the buying price is more than the selling price. It is said to be loss.

 

'When the cost is more than the selling price of any product or service, it is called as a loss.

  

Types of Expenditure

a) Capital Expenditure

Capital Expenditure is the expenditure made for buying a fixed asset. Or in other words when any asset is bought to increase the productivity or the income of the business, it is called capital expenditure. In simple words, all the fixed assets are capital expenditures.

 For example : When any furniture, machinery, building, etc. is bought in the business it becomes capital expenditure. 

 

b) Revenue Expenditure

Revenue Expenditure is the expenditure which is made daily, weekly, fortnightly, monthly or yearly. Revenue expenses are of recurring nature.  These expenditures are not for buying an asset. They are made to satisfy the daily needs of the organisations. 

 For example : Purchase of goods, wages, salaries, postage and telegram, printing and stationery, etc.

 

c) Deferred Revenue Expenditure

Deferred Revenue Expenditure is an expenditure which is made once for all in the business, but is used for the life time of the business. It is not like fixed asset. So as to levy the expenditure for life time of the asset or for a longer period, it is partially written of every year. 

For example : Preliminary expenses, formation expenses, research and development expenses, discount on issue of shares, debentures, etc.

 

Transaction :

 An exchange of goods and services against goods and services or against money is called a transaction.

 In other words exchange of money or money's worth is called a transaction.

 

Transactions are of three types :

a) Cash Transaction : In this type of transaction cash is received paid immediately during the transaction.

For example : If we go to a grocer and buy a chocolate, we pay him cash immediately. Such a transaction is called as a cash transaction.

b) Credit Transaction : When cash is not received or paid instantly during the transaction, it is said to be credit transaction. In such transactions, cash remains accrued.

For example : We go to grocer and buy some groceries and do not pay him cash immediately and tell him that we will pay the amount next month. This becomes a credit transaction.

c) Barter Transaction : When goods and services are exchanged for goods and services, then such transaction is called a barter transaction.

For example : A second hand car is exchanged for a new bike becomes a barter transaction.

 

Capital

An amount invested by the owner of the business in the business is called as capital. The investment may be in cash or in the form of asset.

Suppose a businessman starts the business with cash Rs.1,00,000, brings in the business machinery worth Rs.20,000 and Furniture Rs.5,000 and has a building of Rs.2,00,000. So the total of all these amounts will be the capital. This means that his capital is Rs.3,25,000.

To find out the capital a simple formula is applied :

Capital = Assets minus Liabilities.

 

Drawings

An amount or goods withdrawn by the owner of the business for his personal use is called as drawings.  Drawings is always deducted from capital.

For example : If a businessman uses goods from the business of Rs.10,000 for his household and withdraws cash Rs.5,000 for private purpose. So the total of all these amounts will be drawings. This means that his drawings is Rs.15,000.

 

Liability

Any amount owed to others is called a liability. In other words we can say that, the amount due to others is a liability. 

For example : Capital, Bank Loan, Creditors, Bills Payable, Outstanding Expenses, etc.

 

Reserve

The amount kept aside from the profit of the business, to meet the business needs when the funds are not available is called as a 'Reserve'.

In other words we can say that when unexpected losses occur, the amount used to mitigate those losses is called as a 'Reserve'

For example : Reserve Fund, General Reserve, Depreciation Fund, Building Fund, etc.

 

Discount

The reduction in the selling price of goods to increase the sale of goods is called as 'discount'.

Discount is given on marked price of the goods by the retailer to the customer.

There are two types of discount

Trade Discount

A Ltd. buys the goods on credit from B Ltd. of Rs.1,00,000. B Ltd.  offers A Ltd., a discount of 20% if the goods are bought in bulk quantity. This type of discount is called trade discount.

When a discount is given by a manufacturer to the distributor or from a wholesaler to the retailer is called as 'trade discount'.

This discount is not shown in the books of accounts.

Cash Discount

A customer buys the goods on credit from the supplier of Rs.10,000. If the supplier needs money instantly, he offers the customer a discount of Rs.500. Thus the customer will pay only Rs.9,500 to settle his account. This type of discount is called cash discount.

When a discount is given to the debtor/customer to receive immediate cash from him is called as 'cash discount'.

This discount is shown in the books of accounts. This discount is mainly given by the retailer to the end customer.