Basic Terminologies Of Accounting
BY: SAJJAD AHMAD
MBA (FINANCE)
MSC. ECONOMICS
What is Business ?
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Any legal activity undertaken for the purpose of
earning profit is called business. Such as buying
and selling goods , rendering services or
manufacturing goods.
Types of businesses.
1. Merchandising or trading concerns business.
2. Services concern Business
3. Manufacturing concern Business
Merchandising or trading concerns
business.
3
A business engaged in buying and selling of goods or
merchandise is called merchandising or trading
concern business.
Examples:
Grocery shop
Stationary shop
Medicine shop etc
What is meant by Merchandise?
4
Any thing purchased by a business for the purpose of
reselling them in the same condition is called
merchandise.
Examples.
In stationary shop stationary is merchandise.
In medicine shop medicine is merchandise. etc etc
Services Concern Business
5
A business engaged in providing any type of service is
called services concern business.
Examples. Hospitals ,Educational institutes, Barber shop
etc
Manufacturing Concern Business
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The business engaged in manufacturing goods is called
manufacturing concern business.
Examples.
Carpenter shop
Factories etc
Assets
7
Whatever business possesses which have to give future
economic benefits are called asset
OR
All valuables possessed by a business are called assets.
For Example land, building, furniture, car etc
Liabilities
8
The claim of the external parties on the assets of the
business is called Liabilities
For Example Loan payable, Rent payable, Salaries
payable etc.
Owner Equity
9
It is the amount invested by the owner of the business.
OR
The residual claim of the owner on the assets of the business is
called owner equity.
Example of assets liabilities and owner’s equity
10
If a vegetable shop has total value of assets equal to
$1000 and owner invest $600 from his own pocket and
the remaining $400 he acquire from his friend who is not
owner of the business and invest in the business.
So here $1000 is the value of the assets of business $400
is the liability and $600 is owner equity’s.
Accounting Equation
11
ASSETS = LIABILITIES + OWNER EQUITY’S
$1000 = $400 + $600
This “assets = liabilities + owner equity’s” is called
accounting equation.
Revenue
12
The price of goods sold or services rendered is called revenue.
For Example If business sell 1000 pens @ 5 per pen then 5*1000=
5000 is its revenue.
If 20 patient comes to a Doctor and he charge 200 fee from every
patient then 20 * 200 =4000 is its revenue.
Expenses
13
The cost of doing business is called expense.
OR
The cost of goods and services used up in the process of earning
revenue is called expense.
Examples. salaries, utility bills etc
Profit
14
The excess amount of revenue over the expense of a
business is called Profit.
For Example if a revenue is $ 100 and expense is $ 80
then profit is $ 20.
Loss
15
The excess amount of expenses over the revenue of a
business is called loss.
Example. If revenue is $100 and expenses are $130 then
$30 is loss.
Investors
16
Individual and other businesses that own the business
are investors.
These are owners.
Creditors
17
Individual and others business that provide loan or other
things to the business are called Creditors. These are not
owners.
The parties to whom liabilities are payable are called
creditors
For example Commercial Banks, suppliers etc
Transactions
18
Any dealing between two or more person for goods and
services which effect the financial position of a business
and also can be measured in terms of money is called
business transactions.
For Example
Business purchased land for $52,000 and pay cash for it.
Here business is receiving land which is an asset but for
acquiring one asset it gives another asset cash and
amount of transaction is $52,000.
Types of Transactions
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There are two types of Transactions
Cash Transactions
Credit Transactions
Cash Transactions
20
The transaction where immediate cash collection or
payments is involved is called cash transaction.
For Example
Owner invest $80,000 in business.
Business pay $200 salary to an employee.
Credit Transaction.
21
The transaction where cash collection or payments are made at
some future time is called credit transaction.
Examples.
1.The business sells merchandise of price $400 and the amount
will be received after 15 days.
2.The business purchased computer at $300 and promise that
amount will be paid after 20 days.
Cash inflow or Positive cash flow.
22
These are Cash collection of a business from any source .
If owner invest money , creditor gives loan ,business generate
revenue from all these activities business received cash so this is
called positive cash flow or cash inflow.
Cash outflow or negative cash flow
23
These are Cash payments of a business to any party.
If business pay expenses , repay loans to creditors , owner take
money from business. Business purchased any assets for
business in all these activities business is paying cash so it is
called negative cash flow or cash outflow
Accounting period.
24
The time period for which a business measures its profit and loss is
called accounting period.
OR
The period of time covered by an income statement of a business is
called accounting period.
If a business measure its revenue and expenses for 3 months its
accounting period will be 3 months.
If a business measure its revenue and expenses for one year then
its accounting period will be one year.
Accounting period of one year of a business is called fiscal year.
End of Accounting Basic Necessary Terminologies
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