Accounting is a vast subject. The world over different tools/methods is used for accounting. But now due to globalization, more nations are agreed to the idea of common accounting practices world over. Though there might be some differences but the accounting basics are same world over. So the Accounting terms are almost common and every person should be aware of that as it is a common man subject and used in day to day life.
These below mentioned accounting terms may also be asked in any interview. So in that respect also these are important.
Asset: Any physical thing or right owned that has a money value is an asset. In other words, it is an expenditure which results in acquiring of some property or benefit of lasting nature.
Example: ABC company purchased Computers of Rs. 8 lacs. These are their assets since it has benefit of lasting nature. And since the computers can be used for than one years they can further classified into fixed assets. If the company goods for resale, it is not Fixed asset. It will be shown as current asset (Inventory) since the inventories are purchased for resale.
Liability: The indebtness of a person for an amount is known as his liability.
Example: ABC company borrowed a loan of Rs. 10 Lac from a bank. This will be shown as their liability since they are indebted to pay it back.
Debtor: A debtor is a person who owes money. The amount due from him is called debt.
Example: ABC company made a sale of Rs. 2 lac to a person. So this person is debtor for ABC company since the company has to receive money from it.
Creditor: A person to whom money is owing or payable is called a creditor. All types of creditors are called sundry creditors. To specifically classify them we call them trade creditors and non trade creditors. Creditor itself is grouped under liability.
Example: ABC company purchased goods of Rs. 3 lac from a person . So this person is creditor for ABC company since the company has to pay him Rs. 3 Lac.
Capital: This is owners financial interest or holding in the business and is represented by the value of net assets ( total Assets Less Outside Liabilities)
Example: Mr. A introduced Rs. 10 lac in his business. So Rs. 10 lac is capital of Mr. A in his business.
Equity: A claim which can be enforced against the assest of a business. So Asset is always equal to equity. In other words to purchase the assets you need some resources, so the resources utilized to purchased these assets are called equity. It is right to properties (Assests).
Example: Mr A introduced Rs. 10 lac in his business as capital and purchased inventory of Rs. 5 lac from outside. So his total liability will be Rs. 15 lac out of which 10 lac is capital and Rs. 5 lac is creditor. Which means his total equity is Rs. 15 Lac out of which owner equity is 10 Lac and Creditor equity is Rs. 5 Lac.
Debit & Credit: Any transaction has two effects i.e. either debit or credit. And accordingly the transaction is posted into an account ledger, one effect in debit side and other effect in credit side. So simply speaking debit is the left hand side of an account ledge and credit is the right hand side of an account ledger.
Example: ABC company purchased goods for Rs. 5 lac and paid it through cheque. So in this case, in Goods Ledger, goods will be debited and bank account will be credited.
Goods Account Ledger
Debit Side Credit Side
|Particular||Amount Rs.||Particular||Amount Rs.|
|Goods purchased||5 Lac||Bank A/c||5 Lac|
Income & Expenditure : It is an inflow of assets which results in an increase in owner’s equity. Similary an expenditure take place when an asset or service is acquired.
Drawings: Any amount or goods withdrawn by the owner of a business for personal use is called drawings.
Net Worth: It means assets minus outside liabilities. Profit of a busness increase networth whereas losses reduce the net worth.
Please comment for any query on accounting terms.