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Note on Accounting Terms

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Capital

The amount of money invested by an owner in the beginning or during the life of the business is known as capital. The owner may invest cash or stock or any other own properties to establish and operate the business.

Liabilities

The amount of money payable by the business to outsiders on a specific point of time is known as liabilities. These are the financial obligations of the business. The liabilities are classified into two types:

  1. Long-term liabilities: The amount of money payable by the business to the outsiders normally after a period of one year is called long-term liabilities. Debentures, mortgage loans, long term loans, loans taken from the bank and financial institutions are some of the examples of long-term liabilities.
  2. Short-term liabilities: The amount of money payable by the business to the outsiders normally within a period of one year is called short term liabilities. Bills payable, creditors, bank overdraft, expenses are some of the examples of short-term or current liabilities.

Assets

The office resources which are purchased for generating income or revenue is called assets. Such assets include the material; properties and amount due from others. Such assets are classified into two types:

  1. Fixed assets: The assets which are purchased for generating income for a long period of time is called fixed assets. Land building, plant and machinery, furniture are some of the examples.
  2. Current assets: The assets which can be used or converted into cash within a period of time is called current assets. Cash in hand, cash at bank, bills receivable, debtors, marketable securities and stock are some of the examples of current assets.

Closing stock

The materials or goods which remain unsold at the end of an accounting year are known as closing stock. It may be the stock of raw materials, work in progress and finished goods. The closing stock of the current year is treated as opening stock in the next year.

Debtors:

Debtors are the buyers of goods. The amount receivable from the customers against the good sold on credit is called debtors.

Creditors:

Creditors are the suppliers of goods. The amount payable to the suppliers against the goods purchased on credit is called creditors.

Bills receivable:

The amount of a bill relating to credit sale drawn by the business and accepted by the debtor for paying the amount of goods purchased on credit on a certain date is called bills receivable.

Bills payable:

The amount of bill drawn by the creditor accepted by the business promising in writing for paying the amount of goods purchased on credit on a certain date is called bills payable.

Debit and Credit:

Debit and credit are the terms used for recording the financial transactions. When a financial transaction takes a place, its one is debited and another one is credited. The following are the rules applied for making debit and credit:

1. Personal account: Account of a person of organization or debtor or creditor. The rule of journalism under personal account are:

  • Debit - the receiver
  • Credit - the giver

2. Real account: It is an account of a real things or property. The rule of journalism under real account are:

  • What comes in - Debit
  • What goes out - Credit

3. Nominal account: It is an account of expense, loss, income and profit. The rule of journalism under nominal account are:

  • All expenses and losses - Debit
  • All income and profit - Credit

Cash in hand:

The amount of cash remains in the business on any given point of time is called cash in hand. It includes the amount of petty cash fund and UN deposited amount of cheque.

Cash at bank:

The amount of bank balance is called cash at the bank. The excess of deposit over withdrawal is considered as cash at the bank.

Advanced incomes:

The incomes, which are not earned but received in advance, are advanced incomes. Advance incomes are current liabilities of the business.

Prepaid expenses:

Expenses paid in advance are called prepaid expenses. Prepaid expenses are current assets of the business.

Accrued incomes:

Incomes earned but not yet received are called accrued incomes. Accrued incomes are current assets of the business.

Interest:

Interest is an extra amount paid to a money lender against the use of his money for a given period. The rate of interest depends upon the agreement made between the lender and receiver.

Loan:

The amount borrowed from the individual and financial institution is known as a loan. Interest should be paid to person or institution on the loan borrowed.

Bank:

Bank is a financial institution, which accepts deposits from the public in different accounts and grants loans to individuals and corporations against their securities. The bank is classified into the central bank, commercial bank and development.

Cheque:

Bank is a financial institution, which accepts deposits from the public in different accounts and grants loans to individuals and corporations against their securities. It is the direction given to the bank to pay a certain sum of money a certain sum of money to a certain person or bearer of the instrument. It is an unconditional order drawn upon a specified banker signed by the maker.

Financial transactions:

Bank is a financial institution, which accepts deposits from the public in different accounts and grants loans to individuals and corporations against their securities. Buying and selling goods, taking and giving loans, paying salary, rent, stationery and electricity are some of the examples of financial transactions.

Profit:

The excess amount of incomes over expenditure is known as profit.

Loss:

The excess amount of expenditures over incomes is known as a loss.

  • The amount of money invested by an owner in the beginning or during the life of the business is known as capital.
  • The amount of money payable by the business to outsiders on a specific point of time is known as liabilities.
  • The office resources which are purchased for generating income or revenue is called assets.
  • The materials or goods which remain unsold at the end of an accounting year are known as closing stock.
  • Bank is a financial institution, which accepts deposits from the public in different accounts and grants loans to individuals and corporations against their securities.
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Very Short Questions

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  • The amount of money invested by an owner in the beginning or during the life of the business is known as ______.

    cash


    Fund


    Stock


    Capital


  • The liabilities are classified into ______.

    4 types


    3 types


    none of the answers are correct


    2 types


  • The amount of money payable by the business to the outsiders normally after a period of one year is called ______.

    short term liabilities


    capital


    long term liabilities


    none of the answers are correct


  • Bills payable, creditors, bank overdraft, expenses are some of the examples of ______.

    assets


    long term liabilities


    short term liabilities


    current assets


  • Assets are classifies into ______.

    2 types


    3 types


    5 types


    None


  • The amount receivable from the customers against the good sold on credit is called ______.

    seller


    buyers


    debtors


    creditors


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