1. Business - The term business is derived from the work ‘busy’. Therefore, business means being busy. In specific sense, business refers to an occupation in which people regularly engage in activities related to purchase, production and / or sale of goods and services with a view to earn profits.
2. Preliminary Expenses The expenses incurred when a company is formed and before the start of any business operations are termed as preliminary expenses, they are a good example of fictitious assets which are written off every year from the profits earned by the business. Some examples of such expenses incurred before business incorporation are; Legal cost, Professional fees, Stamp duty etc. It is a type of deferred revenue expenditure 3. Capital- It refers to the amount invested by the owner(s) in the enterprise. It may be brought by the owners in cash or in the form of assets. It indicates the interest of the owner(s) in the assets of the enterprise.
4. Drawings- It is the amount withdrawn or goods taken by the proprietor or partner
for personal use.
5. Assets- These are the properties owned by an entity or enterprise.
a. Non-current Assets- These assets are those assets which are held by an entity or enterprise not with the purpose to resell but are held either as investment or to facilitate business operations i.e more than one year. Example – Fixed assets Fixed assets are held for long use in business itself for the purpose of providing or producing goods or services and are not held for re-sale purpose in the normal course of business, They can be bifurcated into two types I) Tangible - Land, Building, Machinery, Furniture and fixtures etc. II) Intangible – Patents, Copyrights, Goodwill, Trademark etc b. Current Assets- These are those assets which are held by an entity or enterprise with the purpose of converting them into cash within a short period, i.e. within one year. 6. Purchase - The term purchases are used for an account to record purchase of goods or raw materials for resale or for producing products which are also to be sold. The term purchases include both cash and credit purchase of goods. Goods purchase for cash are termed as cash purchases and goods purchased on credit are termed as credit purchases. 7. Cost of Goods Sold - It is direct cost attributable to the production of goods sold and/or services rendered.
8. Trade Payables- It is the amount payable for purchase of goods or services taken in ordinary course of business. Trade payables is the sum total of creditors and bills payables. Creditors are persons and/or other entities who have to be paid by an enterprise an amount for providing goods and services on credit. They are also referred to as accounts payable or trade creditors. The total amount standing to the favor of creditors on the closing date is shown in the balance sheet as ‘sundry creditors’ on the liability side.
9. Expense - are those costs which are incurred to earn revenues whereas expenditures are those costs which are incurred to purchase or increase the value of the fixed assets of the organization.
10. Revenue/Sales- It is the amount received or receivable by the enterprise from its operating activities.
11. Trade Receivables – Debtors are persons and/or other entities to whom goods have been sold or services provided on credit and who thus owe certain amount to the enterprise. They are also referred to as accounts receivable or trade debtors. Debtors are assets for an enterprise and the total of debtors on the closing date is shown on the assets side of the balance sheet as “sundry debtors”.
12. Bad Debts - It is the amount owed to business that has become irrecoverable. It is a loss for the business and the debited to profit and loss account.
13. Discount - It is the reduction in the price of goods or from the amount to be paid to a customer by the enterprise. Discount allowed maybe trade discount or cash discount. a). Trade discount is the reduction in prices by the seller to the purchaser of goods when they buy goods of certain quantity or value. Sales are recorded at net value that is sales minus trade discount. Similarly, purchases are recorded by the purchaser at net value that is purchases minus discount. b). Cash Discount- It is the discount allowed for timely payment of due amount. It is an expense for the party allowing the discount and income for the party receiving cash discount. It is recorded in the books of account of both the parties 14. Profit /Gain means income earned by the business from its operating activities.
15. Loss – The excess of expenses of a period over its related revenues is termed as loss
16. Expenditure - can be defined as the amount spent for a long-term on an asset which gives a long-term benefit like building expenditure, furniture expenditure, plant expenditure etc. 17. Inventory/stock – It is a tangible asset held by an enterprise for the purpose of sale in the ordinary course of business or for the purpose of using it in the production of goods meant for sale. Stock maybe opening stock and closing stock. Opening stock is the stock in hand in the beginning of accounting year. In other words, it is a stock in hand at the end of the previous accounting year. Closing stock is the stock in hand at the end of current accounting. (it can be classified into Direct and indirect inventories) Includes RM, WIP, FG and Stores and spares 18. Liabilities- These are the obligations or debts that the enterprise must pay in money or services at some time in the future. Liabilities are debts, for e.g, amount due to creditors, bank overdrafts, bills payable, loans etc. Like assets, liabilities can also be broadly classified into two categories: a. Long-term liabilities are those that are payable after a period of one year, for e.g, a term loan from a financial institution, debentures etc. issued by a company. b. Short-term liabilities are such obligations of the enterprise that are payable within a year e.g. creditors (accounts payables), bills payable (notes payable), cash credit, overdraft, short-term loans etc
19. Capital Receipts and Revenue Receipts - The primary difference between Capital Receipts vs Revenue Receipts is that Capital receipts are the receipts of non-recurring nature which either creates the liability of the company or reduces the company’s assets whereas revenue receipts are the receipts of recurring nature and are reported in the statement of income of the company.
20. Capital Expenditure & Revenue Expenditure - Capital expenditures are typically one-time large purchases of fixed assets that will be used for revenue generation over a longer period. Revenue expenditures are the ongoing operating expenses, which are short-term expenses used to run the daily business operations
21. Voucher – It is a documentary evidence in support of the transaction
22. Amortization - Amortization is an accounting technique used to periodically lower
the book value of a intangible asset over a set period of time. In relation to a loan, amortization focuses on spreading out loan payments over time. When applied to an asset, amortization is similar to depreciation.
23. Deferred Revenue /Capital Expenditure - It is an expenditure which is
revenue/capital in nature and incurred during an accounting period, but its benefits are to be derived in multiple future accounting periods. Example Advertisement, Preliminary Expenses, Prepaid expenses etc.
24. Prepaid expense- It is an expense that has been paid in advance and the benefit of which will be available in the following year or years. Example – Prepaid Mobile Expenses, Factory License fees. 25. Outstanding Expense/Income- It is in an expense/income that has been incurred/accrued but has not been paid / received yet. Example – Postpaid Mobile Expenses/Accrued interest on FD
26. Extraordinary Item - Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly. 27. Legacies - an amount of money or property left to someone in a will (Capital nature)
28. Contingent assets- A contingent asset may be defined as a possible asset that arises from past events and whose existence will be confirmed only after occurrence or non- occurrence of one or more uncertain future events not wholly within the control of the enterprise. It usually arises from unplanned or unexpected events that give rise to the possibility of an inflow of economic benefits to the business entity. For example, a claim that an enterprise is pursuing through legal process, where the outcome is uncertain, is a contingent asset. As per the concept of prudence as well as the present accounting standards, an enterprise should not recognize a contingent asset.
29. Contingent Liability - A contingent liability is a possible obligation arising from past events and may arise in future depending on the occurrence or non-occurrence of one or more uncertain future events. A contingent liability may also be a present obligation that arises from past events An enterprise should not recognize a contingent liability in balance sheet, however it is required to be disclosed in the notes to accounts, unless possibility of outflow of a resource embodying economic benefits is remote
30. Provisions - Provision is a present liability of uncertain amount, which can be
measured reliably by using a substantial degree of estimation.
Provision is recognized when :
a) an enterprise has a present obligation arising from past events; an outflow of resources embodying economic benefits is probable, and b) a reliable estimate can be made of the amount of the obligation.
31. Difference between Contingent liability and provisions
