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Accounting Basic Terminologies | Double-Entry Book-keeping

Accounting Basic Terminologies | Double-Entry Book-keeping



BASIC TERMINOLOGIES


1. Capital: The amount of money or money's worth investing in a business by its owners in the beginning and during its lifetime is known as capital.


2. Liabilities: The amount of money payable by the business to the outsiders within a certain period of time is known as liabilities. Those are the financial obligations of the business which must be met within a stated time. Credit purchases of goods, borrowing of loans, and expenses that are due but not paid are some examples of liabilities.


The liabilities are of two types: long-term liabilities and short-term liabilities.


a) Long-term liabilities: The amounts of money payable by the business to the outsider normally after a period of one year are known as long-term liabilities. Those are the financial obligations of the business which must be met in a longer period such as 2, 5, 10 years or so. Debentures, mortgage or secured loans, and loans from financing companies are few examples of long-term liabilities.


b) Short-term liabilities: The amount of money payable by the business to the outsiders within a period of one year is known as short-term liabilities. Those are the financial obligations of the business which must be met in a short period such as 3, 6, 9, 12 months or so. Bills payable, creditors, bank overdrafts, and outstanding expenses are some examples of current liabilities.


3. Assets: The economic resources which are owned, possessed, and used by the business for the purpose of generating its revenues are called assets. Examples of assets are cash, cash at the bank, bills receivables, stocks, investments, land, buildings, machinery, and furniture. There are mainly two types of assets which are as follows:


a) Fixed assets: Fixed assets are those assets that are owned, possessed, and used by the business for a longer period for the purpose of generating its revenues. Freehold land and buildings, leasehold business premises, plants, machinery, furniture, and vehicles are few examples of fixed assets. Fixed assets can be categorized into Tangible fixed assets and intangible assets.


i. Tangible fixed assets: The fixed assets which exist in their physical forms are called tangible fixed assets. Land, building, plant, machinery, and furniture are examples of tangible fixed assets.


ii. Intangible assets: The assets which do not exist in their physical forms, but exist only in their financial values are called intangible assets. Goodwill, trademarks, copyright, patent, designs, and patterns are some of the examples of intangible assets.

  • Trademark: Trademark refers to a name, symbol, or design intended to distinctly identify the business and its products. It is registered with government officials with a view to discourage competitors to produce and sell similar products. (Yes) is the trademark of Nike Corporation of the U.S.A. which distinctly identifies its products.

  • Patent: Patent is the right reserved by the business to produce and sell a particular product by registering it with the government office. As a result, no other business can produce the product without the permission of the business that has registered it with the government office.

  • Goodwill: Goodwill refers to a favorable name and fame of the business among its customers. It may result from a good location, good management team and success of the business, and so on. In accounting, however, the amount paid in excess of the value of assets over liabilities purchased from another business is known as goodwill.

b) Current assets: Cash and other such assets which are expected to be used or convertible into cash within a period of one year are known as current assets. Cash, cash at bank, bills receivable, debtors, marketable securities stock, prepaid expenses, and accrued incomes are examples of current assets.


4. Purchase: Purchase is the amount paid or payable for acquiring raw materials or goods on which the business deals. For example, the acquisition of cloths by a cloth merchant from a textile company for cash or on credit is known as purchase:


5. Sales: The amount received or receivable by selling goods to the customer is known as sales. Sales represent the transfer of goods on which the business deals. The transfer of other assets than goods is not regarded as the sale.


6. Debtors: Debtors are the customers or clients who purchase goods or services from the business on credit. They are the persons or institutions who owe some amount of money to the business on account of credit sales. Therefore, debtors indicate the amount receivable from the customers or clients on account of credit sales.


7. Creditors: Creditors are the sellers or providers of goods or services to the business on credit. They are the persons or institutions to whom the business owes some amount of money on account of credit purchases. Creditors represent the amount payable on account of credit purchase to the sellers or providers of goods or services.


8. Stocks/inventory: Stocks represent the number of raw materials, semi-processed materials, or finished goods lying in-store or warehouse waiting for sales.


9. Revenue: Revenue is the amount received or receivable on account of the sale of goods or rendering services. Examples of revenue are sales, the commission received, rent received, interest received.


10. Expenses: Expenses are the amount paid or payable by the business for the purchase of goods and services for the purpose of generating its revenues. Purchases, carriage, wages, salaries rent, interest, advertising, and so on are few examples of expenses.



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