Basic Terminologies

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Overview

There are various terms used in accounting such as capital, cash, bank, cheque, debtors, creditors, bills payable, bills receivable, etc. This note has information about the various basic terminology of accounting.
Basic Terminologies

Capital

The amount of money or stock or any other own properties invested by an owner at the beginning or during the life of the business is known as capital.

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Liabilities

The amount of money payable to the outsiders within a specific point of time by the business 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 to the outsiders normally after a period of one year by the business is called long-term liabilities. Those are the financial obligations of the business which must be metin a longer period such as 2, 5, 10 years or so. Debentures, mortgage loans, long term loans, loans are 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. Those are the financial obligation which must be met in a short period such as 3, 6, 9, 12 months or so. Bills payable, creditors, bank overdraft, expenses are some of the examples of short-term or current liabilities.

Assets

The office resources which are purchased and used by the business for generating income or revenue is called assets. Such assets include cash, cash at bank, bills receivables, stocks, investments, land, buildings, machinery and furniture. Such assets are classified into two types:

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  1. Fixed assets: The assets which are purchased and used by the business 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 of the business 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 or customers of goods. The customers who purchase goods or service from the business on credit is called debtors. Therefore, debtors indicate the amount receivable from the customers on credit sale.

Creditors

Creditors are the suppliers or sellers of goods. The suppliers who sells the goods and services to the business on credits is called creditors. Therefore, the amount payable to the suppliers against the goods purchased on credit.

Bills receivable

The amount of a bill relating to credit sale drawn by the business which is 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.

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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:It is an account of a person ororganization 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 real things or properties. 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 which a business have after it has paid its all cost is called cash in hand. It includes the amount of petty cash fund and UN deposited amount of cheque.

Cash at bank

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

Advanced incomes

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

Prepaid expenses:

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

Accrued incomes

The incomes that are 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 moneylender 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 as 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.

Things to remember
  • The office resources which are purchased for generating income or revenue is called assets. 
  • The amount of money invested by an owner at the beginning or during the life of the business is known as capital. 
  • 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.
  • It includes every relationship which established among the people.
  • There can be more than one community in a society. Community smaller than society.
  • It is a network of social relationships which cannot see or touched.
  • common interests and common objectives are not necessary for society.
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Questions and Answers

Any two intangible assets are:-

  1. Goodwill
  2. Patent

The amount of money invested by an owner at the beginning or during the life of the business is known as capital.

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

The amount of money payable by the business to outsiders on a specific point of time is known as liabilities.

The amount of money payable by the business to the outsiders normally after a period of one year are called long term liabilities. Debentures, mortgage loans, long term loans, loans taken from bank and financial institutions are some of the examples of long 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.

The office resources which are purchased for generating income or revenue are called assets.

The assets which are purchased for generating income for long period of time are called fixed. Land building, plant and machinery, furniture are some of the examples.

The assets which can be used or converted into cash within a period of time are called current assets. Cash in hand, cash at bank, bills receivable, debtors, marketable securities and stock are some of the examples of current assets.

The materials or goods which remain unsold at the end of an accounting year are known as closing stock.

The amount receivable from the customers against the good sold on credit are called debtors.

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

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.

The amount of cash remains in the business on any given point of time is called cash in hand.

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

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

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

Interest is an extra amount paid to a money lender against the use of his money for a given period.

The amount borrowed from the individual and financial institution is known as loan.

Bank is financial institution, which accepts deposits from the public in different accounts and grants loans to individuals and corporations against their securities.

A cheque is an unconditional order drawn upon a specified banker signed by the marker.

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

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