1. Basic Accounting TermsBasic Accounting Terms
AssetsAssets :: Whatever business owns, is treated asWhatever business owns, is treated as
assets. It can be classified asassets. It can be classified as
Fixed Asset : Like land, building, machineryFixed Asset : Like land, building, machinery
Current Asset : Like goods, bank balance ,Current Asset : Like goods, bank balance ,
cash, debtors , bills receivable.cash, debtors , bills receivable.
Tangible Assets : Physically exists.Tangible Assets : Physically exists.
Intangible Assets: Physically does not existsIntangible Assets: Physically does not exists
Wasting Assets :Consumable during the use likeWasting Assets :Consumable during the use like
mines, quarries etc.mines, quarries etc.

2. Liabilities:Liabilities: Mean the amount which business owes toMean the amount which business owes to
outsiders.outsiders. It can be classified asIt can be classified as
Long Term Liability : Payable after a long term like longLong Term Liability : Payable after a long term like long
term loan, debentures, etc.term loan, debentures, etc.
Current Liability : Payable in near future like creditors,Current Liability : Payable in near future like creditors,
bank o/d , short term loan, billbank o/d , short term loan, bill
payable,payable,
etc.etc.
Capital :Capital : The amount (money) which has been invested byThe amount (money) which has been invested by
the proprietor in the business.the proprietor in the business.
CAPITAL = ASSETS – LIABILITIESCAPITAL = ASSETS – LIABILITIES
Expenses:Expenses: The amount spent to produce n sell the goods andThe amount spent to produce n sell the goods and
services.services.

3. Income :Income : Profit earned during a period of time.Profit earned during a period of time.
INCOME = REVENUE – EXPENSEINCOME = REVENUE – EXPENSE
Expenditure:Expenditure: Amount spent or liability incurred for the valueAmount spent or liability incurred for the value
received. It may be of two typesreceived. It may be of two types
Capital Expenditure: Amount spent in purchasing theCapital Expenditure: Amount spent in purchasing the
assets.assets.
Revenue Expenditure: Amount spent in purchasing theRevenue Expenditure: Amount spent in purchasing the
goods and services during thegoods and services during the
accounting period.accounting period.
Revenue :Revenue : Amount received by the sale of goods orAmount received by the sale of goods or
services.services.
INCOME = REVENUE - EXPENSESINCOME = REVENUE - EXPENSES

4. Debtor :Debtor : A person to whom goods has been sold onA person to whom goods has been sold on
credit.credit.
Creditor:Creditor: A person from whom goods has beenA person from whom goods has been
purchased on credit.purchased on credit.
Goods :Goods : They are the items which are part of stock-in-They are the items which are part of stock-in-
trade of business, which are purchased andtrade of business, which are purchased and
are to be resold.are to be resold.
Cost :Cost : Amount spent on manufacturing of articleAmount spent on manufacturing of article
,product or activity.,product or activity.
Gains :Gains : Profit earned by sale of the article.Profit earned by sale of the article.
Stock or Inventory:Stock or Inventory: Tangible assets held by theTangible assets held by the
enterprise for the purpose of sale in ordinaryenterprise for the purpose of sale in ordinary
course of business.course of business.

5. Purchases:Purchases: Purchase of goods.Purchase of goods.
SaleSale :: Sale of those goods in which firm deals.Sale of those goods in which firm deals.
Loss :Loss :Excess of expenses over revenue.Excess of expenses over revenue.
ProfitProfit :: Surplus of revenue over expenses.Surplus of revenue over expenses.
DiscountDiscount :: Any type of Reduction in the prices.Any type of Reduction in the prices.
Drawings :Drawings : Amount of money or the value of goodsAmount of money or the value of goods
proprietor takes for his domestic orproprietor takes for his domestic or
personal use..personal use..
Receivables:Receivables: Amount due from others or amountAmount due from others or amount
receivables from others. (debtors)receivables from others. (debtors)

6. Payables :Payables : Amount due to others. (Creditors)Amount due to others. (Creditors)
Depreciation :Depreciation : Fall in value of an asset because of usage orFall in value of an asset because of usage or
with passage of time or obsolescence orwith passage of time or obsolescence or
accident.accident.
Cost of Goods Sold :Cost of Goods Sold :Direct cost of goods or services.Direct cost of goods or services.
Bad Debts :Bad Debts : The amount that has become irrecoverable.The amount that has become irrecoverable.
It is a business loss.It is a business loss.

7. Accounting EquationsAccounting Equations
Asset = Capital + LiabilitiesAsset = Capital + Liabilities
Accounting EquationAccounting Equation
Cash
Bank
Bills Rec.
Debtors
Closing Stock
Furniture
Machinery
Building
Capital
Creditors
Bills Pay.
O/s Expenses
Bank O/d
Loan
AssetsAssets Are equal toAre equal to Capital + LiabilitiesCapital + Liabilities

8. Transaction from A/c equationTransaction from A/c equation
viewpoint can be divided into twoviewpoint can be divided into two
1.1. Transactions Affecting Two Items; andTransactions Affecting Two Items; and
2.2. Transactions Affecting More Than Two Items.Transactions Affecting More Than Two Items.
Transactions Affecting Two Items:Transactions Affecting Two Items:
1.Transactions affecting opposite side :-1.Transactions affecting opposite side :-
a) Increase in asset, increase in liability.a) Increase in asset, increase in liability.
b) Decrease in liability, decrease in asset.b) Decrease in liability, decrease in asset.
c) Increase in asset, increase in owner’s equity.c) Increase in asset, increase in owner’s equity.
d) Decrease in owner’s capital, decrease ind) Decrease in owner’s capital, decrease in
asset.asset.

9. Transaction affecting same side but in oppositeTransaction affecting same side but in opposite
direction are:direction are:
a)a) Increase in asset, decrease in anotherIncrease in asset, decrease in another
asset.asset.
b)b) Decrease in liability, increase in anotherDecrease in liability, increase in another
liability.liability.
c)c) Decrease in owner’s equity item,Decrease in owner’s equity item,
increase in owner’s another equity item.increase in owner’s another equity item.
d)d) Decrease in owner’s equity item,Decrease in owner’s equity item,
increase in owner’s another equity item.increase in owner’s another equity item.
e)e) Decrease in liability, increase in owner’sDecrease in liability, increase in owner’s
equity item.equity item.

10. Transaction affecting more thanTransaction affecting more than
two items:two items:
 Some transactions affects more than twoSome transactions affects more than two
items . Example:items . Example:
Sale of goods worth Rs 30000 in cash.Sale of goods worth Rs 30000 in cash.
Item affected (costing 25000)Item affected (costing 25000)
Increase Cash by Rs. 30,000Increase Cash by Rs. 30,000
Stock Reduce by Rs. 25,000Stock Reduce by Rs. 25,000
Capital increase by Rs 5,000 (Profit added)Capital increase by Rs 5,000 (Profit added)

11. Derivation of an A/c EquationDerivation of an A/c Equation
An equation can be derived by the following way:An equation can be derived by the following way:
1.1. Ascertain the variables affected by a transaction.Ascertain the variables affected by a transaction.
Assets, liabilities, capital, revenues andAssets, liabilities, capital, revenues and
expenses.expenses.
2.2. Find out the effect of a transaction on theFind out the effect of a transaction on the
variables. Whether increase or decrease.variables. Whether increase or decrease.
3.3. Show the effect on the appropriate side andShow the effect on the appropriate side and
ensure the total must be same of both side.ensure the total must be same of both side.

12. Example 1Example 1
Started business with Rs.1,00,000.Started business with Rs.1,00,000.
1 Variable effected1 Variable effected Assets andAssets and
CapitalCapital
2 effect of Transaction2 effect of Transaction Incr. in Asset and CapIncr. in Asset and Cap
on Affected variableon Affected variable
3 Accounting Equation Assets= Liab.+ Capital3 Accounting Equation Assets= Liab.+ Capital
1,00,000= 0 +1,00,0001,00,000= 0 +1,00,000

13. Types of AccountsTypes of Accounts
Accounts
Personal Account Real Account Nominal Account

14. Personal AccountPersonal Account
This A/c are related with Natural PersonThis A/c are related with Natural Person
Artificial personal and Representative.Artificial personal and Representative.
Natural PersonNatural Person : Ram, Rahim, Mohan.: Ram, Rahim, Mohan.
Artificial PersonArtificial Person: Firms, Companies, Banks: Firms, Companies, Banks
etc.etc.
RepresentativeRepresentative: All accounts representing: All accounts representing
outstanding expenses and accrued oroutstanding expenses and accrued or
prepaid incomes are personal accounts.prepaid incomes are personal accounts.

15. Real AccountReal Account
 Tangible Real Account: like furniture ,Tangible Real Account: like furniture ,
Cash, Machinery etc.Cash, Machinery etc.
 Intangible Real Account : Like goodwill ,Intangible Real Account : Like goodwill ,
trade mark etc, which cannot be touched.trade mark etc, which cannot be touched.

16. Nominal AccountNominal Account
 The names of head of expenses andThe names of head of expenses and
income are called nominal account.income are called nominal account.
Example: Wages account, salariesExample: Wages account, salaries
account, commission account, rentaccount, commission account, rent
account, etc,account, etc,

17. Rules for Debit and CreditRules for Debit and Credit
Personal Account
Debit the receiver’s account and
credit the giver’s account
Real Account Debit the account of what comes in and
credit the account of what goes out.
Nominal Account Debit the account of expenses and
Credit the account of income and gains.
Golden Rule of Journals
Debit what comes in and Credit what Goes out.