12 Terms You Should Know Before Start Studying Accounts
(i) 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 which changes the financial position of a person. Transaction could be a cash transaction or a credit transaction. (ii) Profit: The excess of Revenue Income over expense is called profit. It could be calculated for each transaction or for business as a whole. (iii) Loss: The excess of expense over income is called loss. It could be calculated for each transaction or for the business as a whole. (iv) Asset: Asset is a resource owned by the business with the purpose of using it for generating future profits. Assets can be tangible or intangible. Tangible Assets are the Capital assets which have some physical existence e.g. Plant and Machinery, etc. The capital assets which have no physical existence and whose value is limited by the rights and anticipated benefits that possession confers upon the owners are known as intangible Assets e.g. Goodwill, Patents, etc. Assets can also be classified into Current Assets and Non-Current Assets. Current Assets – An asset shall be classified as Current when it satisfies any of the following:
(a) It is expected to be realized in, or is intended for sale or consumption in the Company’s normal Operating Cycle,(b) It is held primarily for the purpose of being traded,(c) It is due to be realized within 12 months after the Reporting Date, or(d) It is Cash or Cash Equivalent unless it is restricted from being exchanged or used to settle a Liability for at least 12 months after the Reporting Date.
Non-Current Assets – All other Assets shall be classified as Non-Current Assets. e.g. Machinery held for long term etc. (v) 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. Depending upon the period of holding, these obligations could be further classified into Long Term on non-current liabilities and Short Term or current liabilities. (vi) Working Capital : Working capital is the excess of current assets over current liabilities. (vii) Contingent Liability : It represents a potential obligation that could be created depending on the outcome of an event. Contingent liability is not recorded in books of account, but disclosed by way of a note to the financial statements. (viii) Capital : It is amount invested in the business by its owners. For corporate bodies, capital is normally represented as share capital. (ix) Drawings : It represents an amount of cash, goods or any other assets which the owner withdraws from business for his or her personal use. (x) Net worth : It represents excess of total assets over total liabilities of the business. Technically, this amount is available to be distributed to owners in the event of closure of the business after payment of all liabilities. (xi) Debtor : 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, is known as Sundry Debtors.
These debtors may again be classified as under:
(i) Good debts : The debts which are sure to be realized are called good debts. (ii) Doubtful Debts : The debts which may or may not be realized are called doubtful debts. (iii) Bad debts : The debts which cannot be realized at all are called bad debts. It must be remembered that while ascertaining the debtors balance at the end of the period certain adjustments may have to be made e.g. Bad Debts, Discount Allowed, Returns Inwards, etc. (xii) Creditor : A creditor is a person to whom the business owes money or money’s worth. Creditors are generally classified as Current Liabilities. Recommended Read –
AS 12 Accounting for Government GrantsAccounting Standard 13 Accounting for investmentsAccounting Standard 16 Accounting for Borrowing CostsAccounting Standard 3, Cash Flow StatementAccounting standard 2, Inventory valuationAccounting Standard 15: Accounting for Retirement Benefits
