Topic 2

TERMiNOLOGY
Business
accounting

Cash Basis
Only cash transactions are recorded.
Popular form of Accounting.
Expense recorded only when actually
paid in cash.
Income booked only when actually
received in cash.

The specific reason of the cash inflow

or cash outflow is recorded with every
transaction.

Accrual Basis
Both Cash and Credit transactions.

Transaction recorded as and when they occur.

Incomes are recorded when they are earned.
Expenses are recorded when they become payable.
Irrespective of whether they have been actually
paid in cash or not.

Also known as Mercantile Basis of Accounting

Business Transaction
BUSINESS
TRANSACTION
MONETARY

CASH

CREDIT

NON- MONETARY

BARTER

ENTRY

NARRATION

Difference.
MONETARY

NON-MONETARY

Exchange Of Money Or
Moneys Worth
Directly Or Indirectly

Carried out without

the involvement of
money or moneys
worth

Recorded in books of
accounts.

Directly
Indirectly,

Or

Not recorded in the

books of accounts.

Difference.
MONETARY

NON-MONETARY

Exchange Of Money Or
Moneys Worth
Directly Or Indirectly

Carried out without

the involvement of
money or moneys
worth

Recorded in books of
accounts.

Directly
Indirectly,

Or

Not recorded in the

books of accounts.

Cash Transactions:

Cash transactions are those transactions

where the payment / receipt of cash occurs
at the time of transaction only.

Credit Transactions:
Credit Transactions are those
transactions where the payment or receipt
of cash takes place after a specified
period of time.

Barter System:
Barter System is when goods
and services are exchanged
against other goods and
services.
Entry:
Entry is a first record of a
business transaction in the books
of accounts. To pass an entry
means to record a transaction in
a proper form by using the
correct technique in the books of
accounts.
Narration:
Narration is a short explanation
of the business transaction for an
entry . It starts with the word
Being and is written in brackets
below the entry.

Goods
Goods are commodities or articles bought or sold by a
businessman with the motive to earn profit.
The businessman may manufacture the goods himself or he may
purchase them for the purpose of sale.
It refers to the products in which the business unit is dealing.

The items that are purchased for use in the business are not
called goods.
For example, for a furniture dealer purchase of chairs and tables
is termed as goods, while for other it is furniture and is treated
as an asset. Similarly, for a stationery merchant, stationery is
goods, whereas for others it is an item of expense (not
purchases)

&
The excess of Income over Expenses during an
accounting year is known as Profit.
Gain:
A profit that arises from events or transactions which
are incidental to business such as sale of fixed assets,
winning a court case, appreciation in the value of an
asset.

The excess of Expenses over Income during an

accounting year is known as Loss.
The excess of expenses of a period over its
related revenues its termed as loss.
It decreases in owners equity. It also refers to
money or moneys worth lost (or cost incurred)
without receiving any benefit in return, e.g.,
cash or goods lost by theft or a fire accident, etc.
It also includes loss on sale of fixed assets.

Assets
Assets
An Asset is any property owned by a business unit.
Assets are economic resources of an enterprise that can
be usefully expressed in monetary terms. Assets are
items of value used by the business in its operations.
For example, Big Bazar owns a fleet of trucks, which is
used by it for delivering foodstuffs; the trucks, thus,
provide economic benefit to the enterprise. This item
will be shown on the asset side of the balance sheet of
Super Bazaar. Assets can be broadly classified into two
types: Fixed Assets and Current Assets.

Fixed Assets
Assets
which
are
purchased for the purpose
of long term use and are
not usually sold until they
are worn out are called
Fixed
Assets.
They
provide long term benefits
to the Business.
Example :land, buildings,
etc.

Current Assets
Current Assets are the
assets which remain in
the business for a short
period of time (usually
less than a year) and can
be converted into cash
easily.

Example:
debtors(accounts receivable),
bills
receivable
(notes
receivable),
stock
(inventory),temporary
marketable securities, cash
and bank balances.

Fictitious Assets
Fictitious Assets are intangible in nature. These
assets cannot be seen or touched. They can only be
felt. They do not have any physical form of existence
but they can be valued in terms of money. They are
imaginary assets and generally do not have any
exchange value.
Examples of Fictitious Assets
Promotional expenses of a business.
Preliminary expenses.
Discount allowed on issue of shares.
Loss incurred on issue of debentures

Promotional expenses of a business.

Liabilities
The amount payable by business to outsiders is known as
Liability. It is the amount due from the business to various
parties for the benefits received by the business unit.

Big Bazar, for example, purchases goods for Rs.10,000 on credit

for a month from Fast Food Products on March 25, 2005. If the
balance sheet of Big Bazaar is prepared as at March 31, 2005, Fast
Food Products will be shown as creditors on the liabilities side of
the balance sheet. If Big Bazaar takes a loan for a period of three
years from HDFC Bank, this will also be shown as a liability in the
balance sheet of Big Bazaar.

Fixed Liabilities
Fixed Liabilities, also known as Long Term Liabilities, are
funds made available to business units from various
sources for long term use. They are the major source of
funds for the business.

Long-term liabilities are those that are usually payable after a period
of one year, for example, a term loan from a financial institution or
debentures (bonds) issued by a company.

Current Liabilities
Liabilities which are payable in a short period of time
(generally within a year) are called Current Liabilities.
These are sources of short term finance for business
units.

Short-term liabilities are obligations that are payable within a

period of one year, for example, creditors, bills payable, bank
overdraft.

Capital is the money invested by the proprietor of a firm

to start a business. Additionally, the excess of the Assets
over Liabilities is also known as Capital or Net Worth of
a business. As per the business entity concept, business
and its owner are separate entities.
Net worth = Owners Equity = Capital
Owners Equity = Total Equity (Assets) Creditors Equity
(Liabilities)
Net Worth = Capital + Reserves

Capital = Total Assets - Total Liabilities

Total Assets = Fixed Assets + Current Assets

Contingent Liabilities
The liability which may
have to be paid at a future
date, depending upon the
happening
or
non
happening of a certain
event. It does not affect
the financial position of a
business and hence it is
not recorded in the books
of accounts till the event
actually occurs. It is
stated as a foot note to
the Balance sheet, simply
for information.

Contingent Liabilities
A contingent liability is an amount that may be due
depending on future events. Because it cannot be
determined whether the amount must be paid until
events unfold, the company's likelihood of loss is
scored as one of the following:
Probable. The future event or events are likely to
occur.
Reasonably possible. The chance of occurrence of
future events is between probable and remote.

Remote. The chance of future event or events

occurring is slight.

Contingent Liabilities
A contingent liability should be recorded in the
financial statements when (a) it is probable that a
liability has been incurred and (b) the amount of the
loss can be reasonably estimated.
If either (a) or (b) does not apply, then a company
should put a disclosure about the liability in the
footnotes (i.e. notes to the financial statements).
The above information applies to a loss contingency.
Gain contingencies are not recorded until they are
realized or realizable (i.e. cash has been received or
cash is expected to be received).

Contingent Liabilities

Thank You!