basic terms of accounting
TRANSCRIPT
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Basic Terms of Accounting
Santosh Parashar
Associate Professor- Accounting & Finance
IAMR, Ghaziabad
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Capital
Amount invested by the proprietors or Owners Financial Holding
Value of Net Assets i.e. (Assets-Liabilities)
Capital may be owned capital or borrowed capital
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Assets
They are economic resources/properties owned or possessed bya business.
They are acquired by a business that help in earning the revenue.
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Types of Assets Fixed Assets
Current Assets
Liquid Assets
Fictitious Assets
Tangible Assets
Intangible Assets
Wasting assets
Contingent Assets
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Fixed Assets
Assets held permanently by a business.
Assets Which have long life.
Help in earning the future expected profits.
Examples-Plants, Machinery, Land, Building, Furniture, Fittings, Fixtures,
Vehicles, Loose tools etc.
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Current Assets
Assets which can be converted into cashwith in a short period usually a year.
They are generally meant for resale.
They get changed their form very often.
Examples-Cash, Stock of goods,
Bill receivables, Sundry debtors
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Liquid Assets
Assets which are either in the form of cash
or can be convertible into cash quickly.
Examples-
Cash/Bank Balance/Marketable Securities etc.
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Fictitious Assets
Assets which are virtually not the assets .
They are either expenses incurred at the time of commencement
of business or capital losses in the past which are capitalized.
Examples- Debit Balance of P/L-a/c,Preliminary Expenses,
Discount on issue of shares,
Underwriting Commission etc.
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Tangible Assets
Assets which have a physical presence.
Assets which can be seen and touched.
Examples- Cash, Stock of goods, Furniture, Building, Vehicle
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Intangible Assets
Assets which can not be seenand touched.
Assets which do not have aphysical presence but posses
some value.
Examples- Goodwill, Copy rights, TradeMarks, Service Marks, Patent rights etc.
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Wasting Assets
Assets which getexhausted in the courseof time.
Examples-
Natural resourcesextracted from Earth,Sea, Quarries, mines, andpetroleum oil wells etc.
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Contingent Assets
Assets whose existence/value is dependent on the happening or
non-happening of a certain event which is not definite.
Future agreements made presently to supply technology which may
or may not become a reality. If the technology is supplied to thebusiness it becomes assets.
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Goodwill
The value of this intangible asset fluctuates over a period of timedue to changing conditions & Circumstances.
Ex. Popular trade marks, Patents, Exceptionally good contracts,Standard quality, reasonable price, unparallel service, dedicatedlabor force, Honest management of high integrity, soundfinancial position, monopoly power/govt. patronage etc.
GOV .
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Copy rights
A right which does not let the others copy of matter of originalbooks/CDs/ new research etc.
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Trade Mark
This is a mark , graphics, shape of goods and theirpackaging or combination of colors etc. whichdistinguish the goods or services and also give the
legal protection to the same.
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Liabilities
Amounts owed by the business to the owners/outsiders.They are the obligation/responsibilities of a business to pay themoney to outsiders.
Long term Liabilities Which are repayable after a long
period of time. Bank loans/Debentures
redeemable after 5 to 7years/capital introduced by theowners.
Which are repayable within a year
Generally the position of currentassets is strengthened whenever theC.L. are created. Thus to pay the C.L.,the C.A. are reduced.
Sundry creditors/Bills payable/BankOverdraft/Outstanding expenses,incomes received in advance etc.
Short term/Current Liabilities
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Contingent Liability
Possible future liability which may result of decision of
court / sudden failure of operating machinery/ loss or
damage of property or manpower etc.
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Outstanding Expenses
Expenses that have already been incurred but not paid inthat period.
Ex.- O/s Salary/O/s Wages
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Advance incomes
Incomes received in advance but services shall be rendered in future.
Advances from customers, rent received from tenant etc.
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Depreciation
Depreciation refers to two very different butrelated concepts:
a) decline in value of assets, and
b) allocation of the cost of tangibleassetsThis is a non-cash expense that reduces thevalue of an asset as a result of wear andtear, age, or obsolescence etc.
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Transaction Analysis
Business transaction means-Dealing between parties
Business activity
Exchange of goods for servicesReceipt & payment of money
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Kinds of Transactions
On the basis of nature-Cash transaction (when receipt of cash is not postponed but
immediately transferred )
Credit transaction (when receipt of cash is postponed for future )
On the basis of Scope-
Internal- any transaction which is concerned with the activity
within the enterprise (like- charging of Depreciation)
External- A transaction between business and outside parties.
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Exchange Transactions-
Goods or services are exchanged but consideration is given to their value.
Goods of 500 are exchanged for furniture of 500.
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Transfer Transactions-
Transfer of some amount from one account to another.
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Hidden Transactions-
If goods sold for 1000 in credit and amount of 990
received in full settlement. Thus, 10 will be treated as discount
and will be entered the same.
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Discount
Allowance allowed by the trader to his customer from saleable
goods or from receivable amount of cash.
or
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Trade Discount or Functional Discount
Deduction in price given by the wholesaler/manufacturer to
the retailer at the list price or catalogue price.
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Cash Discount
A reduction in the price of an item for sale allowed if
payment is made within a stipulated period.
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Drawings
Assets withdrawn from the business by the owners for their personal use.
These assets are usually cash but can be any other asset withdrawn.
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Entry
Means recording of transactions in the books of accounts.
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Creditors & Debtors
A creditor is a party (e.g. person, organization, company, or
government) that has a claim to the services of a second party. It is a
person or institution to whom money is owed.
The first party, in general, has provided some property or service to the
second party under the assumption (usually enforced by contract) thatthe second party will return an equivalent property or service.
The second party is frequently called a debtor or borrower. The first
party is the creditor, which is the lender of property, service or money.
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Objective
Revenue/ Income
These are the amounts that the business earns by selling
its products or providing services to customers.
Other items of revenue common to many businesses are
commission, interest, dividends, royalties, rent received
etc.
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Articles or items purchased for salespurpose at profit or processing by the
business or for use in the manufacturing
process as raw material are known as
goods.
In other words, goods are commodities in whichthe business deals, for e.g., tables, chairs, desks
etc are goods for a firm dealing in furniture.
Americans use the term merchandise for
goods.
Goods
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Expenses:
These are the costs incurred by a business in the process of earningrevenues. Generally, expenses are the cost of assets consumed or service
used during an accounting period. Expenses become assets or cost.
Some examples of expenses are -wages, salary, rent, interest,
depreciation, telephone charges etc.
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Objective
Purchases
These are the total amount of goods procured by a business on credit orfor cash for use or for resale.
In a trading concern goods are purchased for resale with or without
processing whereas in a manufacturing concern, raw materials are
purchased, processed further into finished goods, and then sold.
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Purchase return & Sales returns
A purchase return occurs when abuyer returns merchandise that it
has purchased from a supplier.
A Sales return occurs when a
seller accepts merchandise that it
has sold to a customer.
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Objective
Bad and Doubtful Debts
A bad debt is an amount owed to abusiness or individual that is written
off by the creditor as a loss because
the debt cannot be collected and all
reasonable efforts to collect it have
been exhausted.
Doubtful debts are those debts which a business orindividual is unlikely to be able to collect. The
reasons for potential non-payment can include
disputes over supply, delivery, the condition of item
or the appearance of financial stress within a
customer's operations.