Asset
An Asset is the possession of a business that provides some value. An asset could be either short-term or long-term.
For Example, Stock, Machine, Plant, etc.
Liability
A Liability is a financial obligation of the business. Liabilities can be of two types:
Short-term Liability
Long-term Liability
For Example, loans, Bills Payable, Bank Overdrafts.
Capital
Capital is an amount the business owner has invested into the business to commence the business activities. Capital can also be further added into the business in the form of additional capital.
For Example, Business Started with cash, Machine, Stock. All these items are collectively called capital.
Double-Entry Bookkeeping
Double-Entry Bookkeeping is a form of accounting in which each transaction has two entries. One is on the debit side, and the other will be on the credit side. It helps the accounts to be in a balanced shape.
For Example, Closing Stock at the end of the year will first appear on the credit of the trading account and then on the asset side in the balance sheet.
Debtors
Debtors are our customers to whom businesses sell goods on credit, considering they will clear the dues in the future.
Creditors
Creditors are our sellers from whom a business purchases goods on credit. Businesses have to pay the dues on time.
Bills Receivable
In bills receivable, the Business owner draws bills of exchange in the name of the customer with the credit sales. Bills of exchange is a legal agreement between the business owner and the customer with a specific date written on it.
Bills Payable
Bills Payable is a legal document at the time of credit purchases drawn by the seller on the business owner. By accepting the bill of exchange, the business owner agrees to pay the dues on the specified date.
9 Drawings
Drawings are the cash amount or any other item withdrawn by the business owner for personal use. Business and business owners are considered as two separate legal entities. Business owners have to pay the interest on drawings to the business.
10 Debit
Debit is an accounting entry is a transaction that shows either an increase or decrease in the asset or liability of the business.
For Example, A machine is purchased by paying through cheque.
In this transaction, the asset account is being debited with new machinery, and the bank account is being credited.
Credit
Credit in accounting is a transaction that shows an increase or decrease in the liability or capital of a business.
For Example, Payment of rent to the landlord. In this transaction, payment of rent reduces the liability of rent and also reduces the cash.
Insolvency
Insolvency is a state of business in which the business is not capable of paying its liabilities.
There are two types of insolvencies:
1) Cash Flow Insolvency: In cash flow insolvency, businesses have enough assets to pay off their financial obligations but not the cash in hand at the moment. Cash flow insolvency can be cured by contacting the lenders to have rescheduled payments.
2) Balance sheet Insolvency: In the balance sheet insolvency, businesses do not have enough assets to pay the financial obligation. In this case, the business owner is declared bankrupt.
Bad Debts
Bad debts are the customers from whom the recovery of the payment of credit sales is not possible. Bad debts are not considered an expense for the business.
Bad Debts Receivable
Bad debts receivable is a transaction where a customer who was earlier considered as non-receivable paid their dues.
Revenue
Revenue is the amount a business has earned in a set time. It is a taxable income. It is a gross Income.
For Example, A business sold 200 units at $5 each in one month.
The total income for the month is 200×5= $1,000.
The revenue formula: No of units sold multiplied by the price of the product.
Cost Of Goods Sold(COGS)
The cost of goods sold is the cost incurred to produce the goods.
COGS is used to know a business’s gross profit.
Gross profit Formula: Revenue- COGS
For Example, A bakery selling cakes can consider the ingredients to make the cake as raw material.
Depreciation
Depreciation is a non-cash expenditure incurred by the business. Depreciation reduces the value of an asset. Depreciation is charged on book value.
It can be calculated in two different ways:
1) Straight-line Method
2) Written Down value method
For Example, A machine purchased at $5000. Depreciation will reduce its value over the years.
Expenditure
Expenditure is the money spent on the purchase of an asset or to increase the value of an asset.
For Example, Machine Purchased for the business.
Expense
Expense is the cost incurred by the business to earn a profit from the goods sold.
For Example, The cost of transportation of goods to the customer.
Inventory/Stock
Inventory is the stock of goods with the business to sell to the customers.
Inventories are of three types
1) Raw Material
2) Work-in-progress
3) Finished goods
Fixed Cost
Fixed cost is the cost that does not change with the change in other factors like production.
For Example, The rent of the land is a fixed cost. It will not change with the change in other factors.
Variable Cost
Variable cost is the cost that changes with the change in other actors.
For Example, The cost of Raw materials will change with changes in production.
Semi-Variable Cost
A semi-variable cost is a cost that remains fixed to a certain extent, and then it changes with the change in other factors.
For Example, The electricity bill of the premises will be fixed to a certain extent, and then it will be aligned with the level of consumption.
Accounting Period
The accounting period states that the business should follow a set period with intervals for the inspection of profits and losses and the expenses incurred in the organization in that particular period.
It helps the business to analyze and compare the two periods. It helps create strategies for the next term. Generally, April to March is considered an accounting period in most countries.
For example: If a business owner prepares books of accounts for his business from the last few years, he can analyze the profits and losses, and expenses over the years to look at what should be treated.
