Basic Accounting Terminology

Before moving to the actual recording of transactions in Chapter 2, a student must be comfortable with a set of basic terms that recur throughout the subject. These are grouped below by theme rather than listed randomly, to make them easier to learn together.

Capital-related terms

• Capital — the amount invested by the owner in the business, either in cash or in kind; it represents the owner's claim on the assets of the business.
• Drawings — cash or goods withdrawn by the owner from the business for personal use; drawings reduce capital.

Assets and Liabilities

• Assets — economic resources owned by the business that have a money value and are expected to provide future benefit. Assets are further classified:
  • Fixed Assets — acquired for long-term use in the business, not for resale (e.g. land, building, machinery, furniture).
  • Current Assets — held for short-term use or expected to be converted into cash within a year (e.g. cash, stock, debtors, bills receivable).
  • Tangible Assets — assets that have a physical existence and can be touched (e.g. machinery, furniture).
  • Intangible Assets — assets with no physical existence but still having value (e.g. goodwill, patents, trademarks).
  • Fictitious Assets — items shown on the assets side that are not really assets at all, but expenses/losses not yet fully written off (e.g. preliminary expenses, discount on issue of shares not yet written off).
• Liabilities — amounts owed by the business to outsiders. Classified as:
  • Long-term Liabilities — payable after a period exceeding one year (e.g. long-term loans).
  • Current Liabilities — payable within one year (e.g. creditors, bills payable, outstanding expenses).

Goods and trading terms

• Goods — articles bought by a business with the intention of reselling them, or using them to manufacture something for resale.
• Purchases — goods bought by the business, whether for cash or on credit.
• Purchases Return (Returns Outward) — goods earlier purchased that are returned to the supplier.
• Sales — goods sold by the business, whether for cash or on credit.
• Sales Return (Returns Inward) — goods earlier sold that are returned by the customer.
• Stock — goods remaining unsold at a given date (Opening Stock at the start of the period; Closing Stock at the end).

Persons owing / owed

• Debtor — a person or entity who owes money to the business, usually because goods were sold to them on credit.
• Creditor — a person or entity to whom the business owes money, usually because goods were purchased from them on credit.

Income and expenditure terms

• Revenue — the amount earned by a business from its regular, day-to-day operating activities (mainly from the sale of goods or services).
• Expense — the cost incurred by a business in the process of earning revenue during an accounting period (e.g. rent, salaries, wages).
• Expenditure — the amount spent, or a liability incurred, in exchange for goods, services or some benefit received. Expenditure is further classified by how long its benefit lasts:
  • Capital Expenditure — incurred to acquire a fixed asset or a long-term benefit (e.g. buying machinery); its benefit extends over several years.
  • Revenue Expenditure — incurred for the day-to-day conduct of the business, whose benefit is exhausted within the same accounting year (e.g. rent, wages).
  • Deferred Revenue Expenditure — a revenue expenditure that is large enough, and whose benefit is expected to last long enough (typically 3-5 years), that it is written off gradually over more than one accounting year instead of all at once (e.g. heavy advertisement expenditure for launching a new product).
• Income — a wider term than revenue; it includes revenue as well as gains from sources other than the main operating activity (e.g. interest received, profit on sale of an asset).
• Profit — the excess of revenue/income over the related expenses for a period.
• Loss — the excess of expenses over revenue/income for a period; also used for an involuntary reduction in the value of an asset not compensated by anything received in return (e.g. loss by fire, loss by theft).

Other common terms

• Voucher — a documentary evidence in support of a business transaction (e.g. a cash memo, an invoice, a receipt). …