Basic terminologies-

Asset: Any thing which has economic value.

Real Assets-

Real assets are physical assets that have an intrinsic worth due to their substance and properties. Real assets include precious metals, commodities, real estate, land, equipment, and natural resources.

A. Fixed assets-

Fixed assets are long-term assets that a company has purchased and is using for the production of its goods and services. Fixed assets are noncurrent assets, meaning the assets have a useful life of more than one year. Fixed assets include property, plant, and equipment (PP&E) and are recorded on the balance sheet.

i) Tangible Assets-

A tangible asset is an asset that has a finite monetary value and usually a physical form. Tangible assets can typically always be transacted for some monetary value though the liquidity of different markets will vary. Tangible assets are the opposite of intangible assets which have a theorized value rather than a transactional exchange value.

• Wasting assets
• A wasting asset is an item that has a limited life span and irreversibly declines in value over time. Such fixed assets could be vehicles and machinery. However, in the financial markets, the term refers to options contracts since the contract will continually lose time value after purchase.

B. Current assests-

Current assets are all the assets of a company that are expected to be sold or used as a result of standard business operations over the next year. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.

Liquid assets-

A liquid asset is something you own that can quickly and simply be converted into cash while retaining its market value.

Some examples of assets that would be considered liquid are:

1. Cash

2. Bank balance

3. Marketable securities

Floating assets:

These do not have stable value and day by day they are in the changing mode e.g. Cash on hand, cash at bank, stock of goods, bills receivables etc.

ii) Intangible Assets-

An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets. Intangible assets exist in opposition to tangible assets, which include land, vehicles, equipment, and inventory.

Fictitious assets-

Fictitious assets are the assets which has no tangible existence, but are represented as actual cash expenditure. The main purpose is to create this account for expenses which are not placed in any account headings.

In other words, fictitious means fake or not real, these are not assets at all but they show in financial statements. Expenses incurred in starting a business, goodwill, patents, trademarks, copy rights comes under expenses which cannot be placed any headings.

• Fictitious assets have no physical existence.
• No realisable value.
• They are amortised in one or more profitable financial years.

Capital:

Owner's investment or equity in a firm. Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner for the business entity capital is an obligation and a claim on the assets of business. It is, therefore, shown as capital on the liabilities side of the balance sheet.

Liability:

 The financial obligation of an enterprise other than owners’ funds. Liabilities are obligations or debts that an enterprise has to pay at some time in the future. They represent creditors’ claims on the firm’s assets. Both small and big businesses find it necessary to borrow money at one time or the other, and to purchase goods on credit.

Non- current Liabilities-

The amount business entities owes and is to be paid for over a period of more than year.

Long- term borrowings-

Loans to be paid in more than a year time

Deferred tax liability-

Deferred tax liability arises when there is a difference between what a company can deduct as tax and the tax that is there for accounting purposes. A deferred tax liability signifies that a company may in future pay more income tax because of a transaction in the present.

Long term provisions-

Long term provisions are usually money set aside for employee benefits such as gratuity; leave encashment, provident funds etc.

Expenses: A cost relating to the operations of an accounting period.

 Revenue: Total amount received from sales of goods/services.

Expenditure

Whenever payment and/or incurrence of an outlay are made for a purpose other than the settlement of an existing liability, it is called expenditure. Expenditure means the spending of money or incurring a liability for some benefit/ service received by the business entity.

Purchase of machinery, purchase of furniture, payment of salaries, rent, etc., are some examples of expenditure.

Revenue Expenditure –

 If the benefit of an expenditure is limited to one year, it is treated as an expense (also called revenue expenditure) such as payment of salaries and rent.

Capital expenditure-

On the other hand, if the benefit of an expenditure is available for more than one accounting year, it is treated as an asset (also called capital expenditure) such as purchase of furniture and machinery.

Deferred Revenue Expenditure –

The term deferred means “postponement”.

Deferred revenue expenditure is the expenditure that is written off( charged) in more than one accounting period because the benefit of such expenditure will accrue in more than one accounting year.

Following points of distinction between capital expenditure and revenue expenditure are worth noting : (a) Capital expenditure increases earning capacity of business whereas revenue expenditure is incurred to maintain the earning capacity.

Difference between capital & revenue expenditure

(a) Capital expenditure is incurred to acquire fixed assets for operation of business whereas revenue expenditure is incurred on day-to-day conduct of business.

 (b) Revenue expenditure is generally recurring expenditure and capital expenditure is non-recurring by nature.

 (c) Capital expenditure benefits more than one accounting year whereas revenue expenditure normally benefits one accounting year.

 (d) Capital expenditure (subject to depreciation) is recorded in balance sheet whereas revenue expenditure (subject to adjustment for outstanding and prepaid amount) is transferred to trading and profit and loss account.

  

 ORIGIN OF TRANSACTIONS

• Transactions are recorded in the books of account on the basis of evidence which are bills of purchase , invoices for sales, debit and credit notes , etc.  These evidences being the basis of recording entry, are known as Source Documents.

• Every Transaction has two aspects based upon dual aspect concept of concept of duality.

The two aspects are

1. Debit (Dr)
2. Credit (Cr)

Rules of debit and credit are applied to each transactions and a voucher is prepared before recording before in the books of original entry in chronological order

A transaction with one debit and one credit is a simple transaction and voucher prepared for such transaction is known as transaction voucher.

There are certain items, which has no documentary proof, such as petty expenses. In such case necessary voucher is prepared showing the necessary details.

VOUCHER –

• Source Voucher
• Accounting Voucher

• SOURCE VOUCHER

Features of Source Voucher

                1. It is a written document.

2.  It is prepared on the basis of evidence of the transaction.

3. It contains an analysis of a transaction i.e. which account is to be debited and which is to be credited.

4. It is prepared by an accountant and countersigned by the authorized signatory.

 

• TYPES OF SOURCE VOUCHER

 

 

• CASH MEMO

Cash memo is the receipt which shows the sale of products or services in cash. It contains the authenticity of certain product's price sold by the supplier.

• INVOICE OR BILL

An invoice, bill or tab is a commercial document issued by a seller to a buyer, relating to a sale transaction and indicating the products, quantities, and agreed prices for products or services the seller had provided the buyer. When the goods are sold on credit then it is issued in duplicate where one is given to the customer and other one is kept by the seller.

• RECIEPT

When cash is received from the customer then receipt is issued in duplicate where original receipt is given to customer and duplicate is kept for the record.

• PAY-IN SLIP

Pay-in-slip is used by banks when a customer deposits a cheque or cash in the bank. The slip has a counterfoil where the stamped copy is given to the customer for the record.

• CHEQUE

A Cheque is a document which orders a bank to pay a particular amount of money from a person’s account to another individual’s or company’s account in whose name the cheque has been made or issued. The cheque is utilised to make safe, secure and convenient payments. It serves as a secure option since hard cash is not involved during the transfer process; hence the fear of loss or theft is minimized.

• CREDIT NOTE

Credit notes act as a source document for the sales return journal. In other words the credit note is evidence of the reduction in sales.

• DEBIT NOTE

 Debit note acts as the Source document to the Purchase returns journal. In other words it is an evidence for the occurrence of a reduction in expenses.

 

ACCOUNTING VOUCHER

Accounting vouchers may be classified as cash vouchers, debit vouchers, credit vouchers, journal vouchers, etc.

A transaction with one debit and one credit is a simple transaction and the accounting vouchers prepared for such transaction is known as Transaction Voucher.

Voucher which records a transaction that entails multiple debits/credits and one credit/debit is called compound voucher. Compound voucher may be:

(a) Debit Voucher

(b) Credit Voucher;

• The source vouchers are analyzed by accountant and he determines in which account or accounts are to be debited and credited.
•  “Accounting Voucher” is a written document containing an analysis of business transactions for accounting and recording purposes, prepared by the accountant on the basis of supporting vouchers and signed by another authorized person.

COMPOUND VOUCHER

Voucher which records a transaction that entails multiple debits/credits and one credit/debit is called Compound Voucher.

An accounting voucher must contain the following essential elements :

• It is written on a good quality paper;

• Name of the firm must be printed on the top;

• Date of transaction is filled up against the date and not the date of recording of transaction is to be mentioned;

• The number of the voucher is to be in a serial order;

• Name of the account to be debited or credited is mentioned;

• Debit and credit amount is to be written in figures against the amount;

• Description of the transaction is to be given account wise;

• The person who prepares the voucher must mention his name along with signature; and

• The name and signature of the authorised person are mentioned on the voucher.

Summary of Accounting terminologies-

1. Capital: Owner's investment or equity in a firm.

2. Cash Discount: An allowance given by the creditor to the debtor on the amount due for prompt payment.

3. Creditor: One to whom the business owes some amount.

4. Debtor: One who owes some amount to the business.

5. Drawings: Amount withdrawn by the owner from the business for personal use.

6. Equity: The claim or right over the assets of the firm. It includes both the owner's and the creditor's claims.

7. Expenditure: Spending of money or incurring a liability for some benefit or service received by the business.

8. Gain: Profit arising from peripheral or incidental transactions.

9. Goods: Good are the mercantile things in which the business deals.

10. Income: It is the amount earned through business operations.

11. Revenue: Amount realized for the goods sold or services rendered.

12. Stock: Raw materials, semi-finished goods and finished goods lying in stores.

13. Trade Discount: An allowance given by the seller to the buyer on the list price at the time of sale.

14. Voucher: A documentary (written) evidence of a transaction is called a voucher. For example, if we buy goods for cash we get cash memo: if we buy on credit we get an invoice; and so on. Entries in books of account are made with the help of such vouchers.

15. Solvent: A person who is in a position to pay his debts as they become due.

 16. Insolvent: A person who is not in a position to pay his debts in full and is so declared by the court.

17.  Bad debts: The amount of debt which is unrealizable from a debtor who became insolvent.

18. Capital Expenditure: An expenditure which results in the acquisition of a fixed asset or addition to a fixed asset, or improvement of the earning capacity of the asset.

 19. Capital Losses: Losses which do not arise in the normal course of business.

20. Capital Profits: Profits not earned in the regular course of business.

21. Capital Receipts: Receipts in the form of additions to capital, liabilities or sale proceeds of fixed assets.

22. Deferred Revenue Expenditure: A revenue expenditure which involves a heavy amount and the benefit of which is likely to spread over a number of years.

23.  Revenue Expenditure: An expenditure whose benefit is limited to one year.

24. Revenue Losses: .Losses that occur in the regular course of business.

25. Revenue Profits: Profits earned in the normal course of business.

26. Revenue Receipts: Receipts arising out of services rendered or goods sold.

27. Capital Reserve : Reserve created out of capital profits.

28. Open Reserves : Reserves which are clearly shown in the financial statements.

29. Provision : Amount set aside of current earnings of a business for depreciation, repairs or renewals or meeting a known liability the amount of which is uncertain.

 30. Reserve : Amount set aside out of profits or surplus to meet unexpected contingencies or provide funds for growth.

31.  Revenue Reserve : Reserve created out of normal business profits.

32. Reserve Fund : That part of reserve which is invested outside the business.

33. Sinking Fund : A fund created out of earnings to repay a long term liability or replace an asset.

34.  Secret Reserves : Reserves, the existence of which is not revealed in the financial statements.

35. Books of Account: These are the different sets of records, whether in the form of bound books or loose sheets wherein the various business events and transactions are recorded e.g., journal and ledger. If necessary, the journal and also the ledger may be sub-divided into a number of books.

36.  Entry: The recording or entering a transaction or event in the books of account is called an entry. Journal: Journal is the book of prime entry. It is used for recording all transactions and events of a business entity in the first stage.