2[1]. Basic Terms in Accountancy - 1

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Basic Terms in Accountancy : 

1 Basic Terms in Accountancy Accounting: The art of scientifically classifying, summarizing and recording the transactions of an enterprise and interpreting the results thereof.

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2 Accountancy: Set of rules, principles, techniques and formats which enable the analyzing and recording the transactions uniformly.

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3 Goods: Commodities in which a trader deals are called as ‘goods’. This is a relative term. Goods for one trader can be asset for the other.

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4 Stock: Goods unsold lying with the business on any given date is called stock. In a manufacturing concern, there may be three types of stock – stock of raw materials, stock of work – in – process, stock of finished goods.

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5 Capital: The total amount invested in business by the owner of the business. In the accounting sense, capital is the excess of assets over liabilities. Capital = Assets – Liabilities.

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6 Drawings: The amount withdrawn by a trader from his business to meet his personal expenses. Even goods or any other thing withdrawn by the owner for personal purpose are also known as ‘drawings’.

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7 Assets: Any kind of property owned by the business is known as asset; such as; land, building, plant, furniture, machinery, cash, goodwill, etc.

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8 Depreciation: An invisible loss in the value of fixed assets due to wear and tear and also due to time impact. Due to depreciation, the value of the fixed assets decreases year by year.

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9 Liabilities: All the payable amounts of the business are liabilities. Debts owed by a trader are called liabilities; such as bank loan, bank overdraft, outstanding wages or outstanding rent, etc.

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10 Debts and Debtors: Debts arise when goods are sold on credit basis. Amounts receivable from credit customers are called as debts. The customers to whom goods are sold on credit basis are known as Debtors.

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11 On Accounts: Amount received or paid as part payment of the total dues is called as ‘on accounts’.

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12 Insolvent: A person whose liabilities are more than his assets. He is unable to pay his liabilities fully.

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13 Prepaid Expenses or Incomes Received in Advance: It is the amount of expenses paid or incomes received in advance. Amounts are received or paid against which goods or services are not supplied or received yet.

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14 Outstanding: It is the amount of expenses payable or incomes receivable. Goods or services are received for which amount is not paid yet.

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15 Bad Debts: Debts which are irrecoverable and written off from Debtors Account as a loss are termed as ‘Bad Debts’.

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16 Creditors: A creditor is a person to whom our business owes something. Creditors are those suppliers from whom our business purchases goods on credit basis.

Double Entry System : 

17 Double Entry System Definition: “Double entry system is a system which enables to record, analyze and interpret all the monetary transactions, related to the business, in the books of accounts.”

Ledger Accounts : 

18 Ledger Accounts Ledger: Transactions are recorded in the journal first and then they are posted into the ledger in respective accounts. Ledger is prepared on completion of journal entries. “A group of accounts is known as ledger.” The ledger includes all the basic accounts needed for the preparation of the financial statements. Therefore the ledger is divided into four types – Debtors Ledger, Creditors Ledger, General Ledger and Personal (Proprietor’s) Ledger.

Trial Balance : 

19 Trial Balance Definition: “A Trial Balance is a statement or list of debit and credit balances of all the ledger accounts as on a given date.” Before preparing a Trial Balance all ledger accounts must be totaled or balanced. A Trial Balance is prepared in two ways, either taking totals of all the ledger accounts or considering their balances.

Journal and Ledger : 

20 Journal and Ledger Journal: The word ‘journal’ is derived from the French work ‘jour’ which means a day. Journal, therefore, means daily record. “Journal is a book of original entry or primary entry.” Every transaction is first recorded in the journal from which it is posted in the ledger. Journalizing means recording a transaction in the journal and the form in which it is recorded is called a journal entry.