1.d.fin.accts - terminology

7/28/2019 1.D.fin.Accts - Terminology

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FINANCIAL ACCOUNTING

Introduction

Understanding the terminology


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Any doubts ?

Dont hesitate to interrupt and stop me to

ask your doubt or seek clarification.


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Entity & Business Entity

A thing or a person having a definite

separate existence.

Business Entity means a specially

identifiable business enterprise,

i.e. having a separate existence from that

of the owners of the enterprise.


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Proprietor or Owner

The person who invests money or

moneys worth into the business as

capital, and bears all the risks of the

business.

He will enjoy the profits of the business

and, by default, also bears the losses of

the business.


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Equity

The claims against the assets of an

enterprise or rights in the assets of an

enterprise. The residual interest in the

assets of the enterprise after deducting allits liabilities.

It is the difference between enterprises

assets and liabilities.

Equity = Assets minus (outside) liabilities.


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Equity

Types: 1. Owners equity claims of the

owner against assets of the enterprise.

2. Outsiders equity Claims of outsiders

against assets of the enterprise.

Important claims of outsiders on assets

of business entity will always have priority

over claims of owners on assets of

business enterprise.


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Capital

The amount of money or moneys worth

say, stock of goods, furniture, machinery,

etc. invested or introduced by proprietors

or partners or investors into the businessis capital. Share capital is the amount

contributed by shareholders towards

companys share capital and is entered incompanys Share Capital A/c. One unit

of capital is a share and in US, it is stock.


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Net Worth or Net Assets

Net Worth is the excess of the total assets

of a business over its total liabilities at a

particular point of time.

NW or Net Assets is always at any point of

time and not for any period (say year or

month or week).

Net Worth = Total assets - Total liabilities.


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Drawings

This refers to cash, goods or other assetwithdrawn (i.e. taken away) by theproprietor or partner from his business for

his personal or private or domestic use orpurpose.

It is deducted from capital at the end of theyear, unless specifically repaid byproprietor or partner earlier to year enddate.


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Liabilities

Claims of outsiders against business

concern which binds the business concern

to others. In other words, liabilities are

outsiders equity. A liability is a presentobligation of the enterprise arising from

past events, settlement of which is

expected to result in an outflow from theenterprise of resources embodying

economic benefits.


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Assets

Economic resources (enough / sufficient)owned by the business concern forcarrying on the business. Resources

controlled by the enterprise as a result ofpast events, from which future economicbenefits are expected to flow to theenterprise. Assets are what an enterprise

own and realizes by receiving cash orother assets. Assets are either cash orshould be able to generate cash.


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Assets - Debts Receivable

Debts or amount due to the business fromothers Sundry Debtors, Bills Receivable,

Accrued Income. Debt : The amount of a

business transaction due from a person(i.e. Debtor) to the business is called debt.

Bills Receivable means Bills of Exchangedrawn by seller of goods and accepted bypurchaser of goods and it has legal validityunder Negotiable Instruments Act.


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Debtors

Debtors: A person who owes money to the

business, because he has received some

benefit from the business earlier.

Debtors constitute of : 1.Trade debtor,

2. Loan debtor, 3. Debtor for services

rendered on credit, 4. Debtor for assets

sold.


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Book Debt

The amount due to the business from adebtor as per the books of accounts.

Good Debt: Refers to a debt which can be

collected in full and there is no doubtabout its record.

Doubtful Debt: Refers to a debt whose

realization or recovery is uncertain ordoubtful.

Bad Debt: Debt which is irrecoverable.


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Creditor

A person to whom the business owesmoney because he has given somebenefit to the business earlier.

Creditors consist of: Trade creditor, Loancreditor, Expense creditor, and

Creditor for assets purchased on credit

(last category of creditor is also calledcreditors for capital expenditure abb.Creditors for Capex).


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Solvent

Solvent: A businessman is said to be

solvent when he is able to pay liabilities in

full and on time.

Insolvent: A businessman is said to be

insolvent when he is not able to pay his

liabilities in full.

Other words for insolvent bankrupt or

pauper.


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Goods

Goods refers to merchandise, commodities,products, articles or things in which a traderdeals, and which are meant for sale.

Sales: Value of goods sold by a business arecalled sales. It is revenue or income for thebusiness.

Purchases: Value of goods purchased by a

business are called purchases, and these arenormally meant for sale or use in manufacture ofproducts or for use in providing services.


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Purchase Returns

Also called Returns Outwards or Returns

to Suppliers : Goods returned by business

to its suppliers out of the purchases

already made (may be excess supply orrejection or not conforming to the

specifications as required by business or

expired goods in case of pharmaceuticalgoods or cosmetics or products from food

processing industries).


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Sales Returns

Also called Returns Inwards or Returns

from Customers.

Goods returned by the customers out of

sales already made to them, for any

reason: rejection for quality, excess

supply, not as per specifications, expired

goods, etc.


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Inventory or stock

Inventory or stock refers to the stock of

finished goods held for sale in the ordinary

course of business, or the stock of raw

materials and work-in-process (i.e. partlyfinished goods or semi-finished goods)

held for consumption in the production of

finished goods for sale or stock ofconsumable stores, held for use in the

production process or packing materials.


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Inventory or stock

In case of machinery manufacturers or

automobile industry, components and

spare parts are also part of inventory.

As per US usage, stock means shares in

the corporation or company, held by an

investor. In India also, the word stock

option refers to shares and not inventory.


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Expenses and Loss

Expenses: means the cost incurred or

amounts spent in the process of earning

revenues in an accounting period (usually

a year). In short, it is the cost of economicresources used up for achieving sales.

Loss: refers to money or moneys worth

given up (spent) without getting anyeconomic benefit in return.


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Revenue/Income/Gain/Profit

Refers to the earning of a business from sale of

goods or from rendering of services to the

customers during an accounting period (year).

Gain: Refers to the revenue which is notgenerated through routine or regular business

activities.

Profit: Excess of revenue over the expenses of

a business during a given period of time, usually

a year.


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Debit (Dr.)

Means what is due (Latin word debere).

It is the amount owned by or due from an

account or charged to an account for the

benefit received by the account.

Debit is entry on the left hand side (LHS)

of account. It refers to an increase in

value of an asset or decrease in fair valueof liabilities, or an expense.


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Credit (Cr.)

Means trust or belief (Latin word credere).It is the amount owned to an account forthe benefit given by that account in the

belief that its value will be returned at alater date.

Credit is an entry on the right hand side(RHS) of an account. It refers to anincrease in value of liabilities & decreasein value of assets, or an income.


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Carried down or brought down

It is written in a ledger a/c., at the time of

balancing it, at the end of an accounting

period, to indicate that the account has

been carried down to the next period.

Usually abbreviated as C/d or B/d.


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Carried or Brought Forward

Where journal entries extend to many

pages, totaling done at the end of each

page of the journal, are carried forward to

the next page. In such cases, theabbreviation c/f is written at the bottom,

on LHS of the total. The subsequent page

on top indicates the totals of the previouspage and to indicate this, we write the

abbreviation b/f.


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More about ASSETS

1. Refers to things and rights of valueowned by a business and amount due tothe business from others.

2. Only certain assets,(i.e. Debtors, Loans,Advances, Deposits with others, etc.)make others indebted to the business.

3. Assets are useful to the business.

4. A business necessarily has certainassets. 5. Assets show debit balance.


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More about LIABILITIES

1. Refers to the amount owned by a

business to others (i.e. outsiders).

2. All liabilities make the business

indebted to others.

3. Liabilities are burden to the business.

4. A business may or may not have

liabilities.

5. Liabilities show credit balance.


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Assets versus Liabilities

These two slides explain the difference

between assets and liabilities or their

distinguishing features.


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More about CAPITAL

1. Owners contribution may have a credit

or debit balance (if drawings for personal

purposes are more than capital

contributed + profits earned and retained).

2. It is long term fund. 3. May or may not

be repaid. 4. Capital is repaid only after all

liabilities are repaid. 5. Capital cannot besecured by a charge on asset.


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More about LIABILITIES

(features distinguishing it from capital)

1. Outsiders contribution always has a

credit balance.

2. Long term as well as short term fund.

3. Must be repaid by the business.

4. Must be repaid before repaying capital. 5. Liabilities can be secured by a charge

on asset.


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Capital Versus Liabilities

These two slides explain the difference

between capital and liabilities or their

distinguishing features.


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Accounting equation

The accounting equation may be stated as

a statement of equality between the

resources (i.e. assets and the sources of

finance)

Accounting equation:

Resources = Sources of finance.

Assets = Capital + Liabilities.


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Advice to become Professional

To be a good Professional:

Always start to study late for the

examinations.

It teaches you (or you will learn) :

1) How to manage time, and,

2) How to tackle emergencies. In short, you will be an expert in Time

Management & Disaster Management.


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What next ?

In the next class.

Thank you.


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Assignment 3

Show the following transaction in

accounting equation: for example:

Mohan commenced business with cash

Rs.7,00,000.

Assets (Cash) = Liabilities (none) + Capital

Rs.700000 = NIL +700000.


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Assignment 3

1. Mohan commenced business withRs.7,00,000.

2. Withdrew cash for private use: Rs.1700.

3. Purchased goods on credit: Rs.14000. 4. Purchased goods for cash: Rs.10000.

5. Sold goods on credit: Rs.15000.

6. Sold goods on cash: Rs.4000. 7. Paid wages:Rs.300.


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Assignment 3 (continued)

8. Paid to creditors: Rs.10000.

9. Purchased furniture for cash: Rs.500.

10. Outstanding salary : Rs.500. 11. Rent paid in advance: Rs.400.

12. Depreciation on furniture: Rs.20.

13. Received from customer on account:Rs.5000


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Assignment 4

A. Use the accounting equation to show

their effect on assets, liabilities and capital:

1) Invested cash in business : Rs.15000.

2) Purchased securities for cash:Rs.7500.

3) Purchased building for Rs.1500000,

giving cash Rs. 5000, and balance through

loan from bank.

4) Sold securities for Rs.1000 at Rs.1500.


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5) Purchased an old bike for Rs.8000, andpaid cash Rs.3000.

6) Paid cash for loan installment : Rs.5000

and interest Rs.18750 for one month. 7) Paid cash for household expenses:

Rs.3000.

8) Received dividend on securities :Rs.200 by cheque and deposited in loanaccount.


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B. Total Liabilities of a business are

Rs.350000 and owners capital is

Rs.150000. Calculate total assets of the

business.

C. Renuka has assets of Rs.400000 and

liabilities of Rs.275000. Calculate her

capital.


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D. Calculate missing amounts, using

accounting equation:

1) Assets Rs.20000, Liabilities Rs.15000,

Capital ?

2) Capital Rs.5000, Liabilities Rs.25000,

Assets ?

3) Assets Rs.80000, Capital Rs.20000,

Liabilities ?

1.d.fin.accts - terminology

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