Important Terms

Before attempting to learn the art or science of bookkeeping it will be better to clarify some of the terms that will have to be used again and again.

Assets: These are the things of value possessed by a businessman such as building, land, machinery, furniture, etc. Assets are categorized as

Current Assets: those assets which are already in cash or which is easily and quickly converted into cash after some time like Cash, Accounts Receivable, Stocks etc, and

Fixed Assets:  Assets purchased for permanent use or for use more than one accounting period in the business are called fixed assets. These are further classified as

Tangible: those assets which have there physical existence such as Building, Land, Machinery, Plant, Vehicles, Furniture and fittings, and

Intangible: those assets which have not there physical existence (Goodwill, Patent, Copy right, Franchise etc)

Liabilities: They are the debt due by a business to its proprietor and others. In other words, the claims of the outsiders against the assets of the business are also called liabilities. These are further classified as

Currents Liabilities: which are payable within one year

Long term Liabilities: These are liabilities which are not payable immediately or in the near future.

Equity: A claim which can be enforced against the assets of the firm is called equity. In other words, the rights to properties (Owner of the business) are called equities. Equities are of two types:

The right of creditors: The equities of creditors represent debts of the business and are called liabilities. and

The right of owners: The equity of the owner is called capital, proprietorship or owner's equity.

Expenditure:

Expenditure takes place when assets or service is acquired.

The benefit will be available for future activities of the business.

Expense:

It means an expenditure whose benefit is finished or enjoyed immediately such as salaries, rent etc.

the benefit of the former is consumed by the business in present

Income or Revenue:  All sorts of income received or accrued are called as income/revenue. In business revenue/income may be earned from sale of goods, commission, interest, discount etc earned

Transaction: Any dealing between two persons or things in a transaction or money’s worth is called transaction. It may relate to purchase and sale of goods, receipt and payment of cash and rendering of services by one party to another. Transaction is of two kinds –

Cash transaction: When cash is paid or received as a result of an exchange, the transaction is said to be a cash transaction, and

Credit transaction: When the payment or receipt of cash is postponed for future date, this transaction is said to be credit transaction (Goods purchased on account from Qamar etc)

Business: It includes any activity undertaken for the purpose of earning profit e.g., banking business, and insurance business, a merchant business etc., etc.

Proprietor: He is the owner of a business. He invests capital in it, gives his time and attention to it. He is entitled to receive the profit or bear loss arising out of it.

Drawings: The cash or goods taken away by the proprietor from the business for his personal uses are called have drawings.

Purchases: Goods purchased are called purchases. When the goods purchased for cash they are called cash purchases but if they are purchased for which payment will have to be made at some future date it is known as credit purchases.

Purchases Returns/ Returns Outwards:  If goods purchased are found defective or unsatisfactory, they are sometimes returned to the persons from whom they were purchased or to suppliers are called purchases returns or returns outwards.

Sales: Goods sold are called sales. When goods are sold for cash they are called cash sales, but when they are sold without having received payment, they are credit sales.

Sales Returns/ Returns Inwards: If a person to whom goods have been sold finds that they are defective or unsatisfactory and return them, are called sales returns or returns inwards.

Trade Discount: It is rebate or allowance from the scheduled price granted by the seller to the buyer. Trade discount is usually granted in the following circumstances:

When selling to a fellow trader.

When the buyer is an old customer.

When sales are made in bulk.

As a custom of trade.

Cash Discount: It is deduction or allowance allowed by creditor to a debtor. If a person pays his debit before the due date of payment the recipient may grant him an allowance for doing so. This allowance is known as cash discount

Commission: It is a form of remuneration for services rendered by one person to another.

Account: A summarized record of transactions relating to person or thing is called an account.

Debtor (Account Receivable): A person who owes money to another is a debtor. When we say that we owe Mr. Sunny $200, we mean that we have received from Mr. Sunny $200 which we have to repay. We stand as debtor to Mr. Sunny for $200. It is also termed as accounts receivable.

Creditor (Accounts Payable): A person who pays out something or to whom money owes is a creditor. It is also termed as accounts payable.

Voucher: Any written evidence in support of a business transaction is called a voucher. When a ream of paper is bought from a stationer, he gives a cash memo. The cash memo is a voucher for the payment. When wages for the month are paid to the peon, receipt is taken from him. The receipt serves as a voucher for the payment.

Goods (Merchandise): It includes all merchandise commodities which are purchased by the business for selling.

Stock (Inventory): Goods or merchandise on hand, that is goods remaining unsold, is called stock, stock in trade, or inventory.

Entry: to record a business transaction in the book with and with two kind of financial changes is known as entry

Narration: It is the remark or explanation put below each entry in the Journal is called narration.