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To understand accounting, you must first master its specific vocabulary. Here is a detailed look at the core terms as per the latest syllabus.
A business unit that has a definite individual existence. In accounting, we follow the Business Entity Concept, which means the business is separate from its owner.
An economic event that involves a transfer of money or value between two parties. It must be measurable in terms of money.
- Cash Transaction: Money is exchanged immediately.
- Credit Transaction: Promise to pay in the future.
Capital: The amount invested in the business by the owner. It can be in the form of cash or assets. It is a liability for the business (Internal Liability).
Drawings: Any cash or value of goods taken by the owner for Personal/Home Use. It reduces the capital of the business.
Resources owned by the business that will provide future economic benefit.
• Non-Current Assets: Held for long-term use (Building, Machinery).
• Current Assets: Held for short-term, expected to be converted to cash within 1 year (Stock, Cash, Debtors).
Financial obligations or debts that the business must pay to outsiders in the future.
• Non-Current Liabilities: Long-term debts (Bank Loans for 5 years).
• Current Liabilities: Short-term debts payable within 12 months (Creditors, Short-term loans).
Spending money or incurring a liability to acquire assets, goods, or services.
• Capital Expenditure: Spent to acquire Fixed Assets (Buying a Truck). Benefit lasts many years.
• Revenue Expenditure: Spent on day-to-day operations (Paying Salary, Rent). Benefit is used up within the year.
Expense: The cost incurred to earn revenue (e.g., Wages, Electricity, Carriage).
Revenue: The total amount of money received from the sale of goods/services in the normal course of business (Sales, Commission received).
• Profit: Excess of total revenue over total expenses from regular activities.
• Gain: A profit that arises from incidental activities (Selling an old car at a profit).
• Loss: When expenses are more than revenue (The deficit).
• Income: A broader term; Profit + other incidental revenues. (Income = Revenue - Expense).
Goods: Items the business deals in (e.g., furniture for a furniture dealer).
Purchases: Only refers to buying Goods for resale. Buying a computer for office use is "Asset Purchase," not "Purchases."
Sales: Transfer of ownership of goods to a customer for a price.
The value of goods that are lying unsold at the end of the accounting period. It is a Current Asset.
Debtors: Customers who owe money to us because we sold them goods on credit. (Asset).
Creditors: Suppliers to whom we owe money because we bought goods on credit. (Liability).
The written documentary proof of a transaction. Without a voucher, a transaction cannot be recorded in the books.
• Trade Discount: Allowed by the wholesaler to the retailer for bulk buying. It is NOT recorded in the books.
• Cash Discount: Allowed to a customer to encourage quick payment. It IS recorded in the books.
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