DEMO

DEFINITION OF ACCOUNTING TERMS

By the end of the subtopic, leaners should be able to:
  1. Define various accounting terms.
  2. Give examples of various terms in accounting.
  3. Explain the meaning of various accounting terms.

Capital

  • These are resources brought in for use in the business by the owner or investor and may be in the form of money or tangible assets.
Example:
  • T. Chandalala brought in $20 000 cash into the business and two motor vans valued at $88 000 each for use in the business.
  • From the above the total capital will be valued at $196 000. This means that the value of resources brought to start the business by T. Chandalala is $196 000.

Assets

  • These are resources owned by a business.
  • Examples of assets may include buildings, cash, debtors, motor vehicles and machinery.
  • Resources brought in by the owner are equal to resources owned by a business, hence:
Assets = Capital

Non-current (fixed) assets

  • These are resources with a life longer than one year, bought for use in the business and not with the intention of reselling them.
  • Fixed assets can either be tangible or intangible. Buildings, motor vehicles, office furniture, goodwill, patents, plant and machinery are good examples.

Current assets

  • Current assets may consist of stock, debtors, prepayments, bank or cash held by the business.
  • Current assets are those resources which have a short life span usually not more than a year.
  • They can also be defined as those resources that can easily be converted into cash.

Liabilities

  • These are lawfully binding debts of the business that are payable to another party or business entity.
  • When the capital of the business is not sufficient, it may borrow so that it can purchase more assets.
  • This can be represented by the following accounting equation:
Assets = Capital + Liabilities
  • Liabilities can be long term or short term.

Current (Short term) liabilities

  • These are debts incurred by the business that will have to be paid within a period of one year, hence the term short term.
  • Current liabilities can be in the form of bank overdrafts, accrued expenses and creditors.

Non-current (Long term) liabilities

  • These are debts incurred by the business that can be repaid over a period of more than one year.
  • Debentures, long term loans and mortgage loans are good examples of non-current liabilities.

Source documents

  • These are documents where transactions are recorded first before they are entered in any books of accounts.
  • Whenever there is an exchange of goods between two parties or provision of services, documentation of the transactions is issued to the receiver. This is known as a source document.
  • Source documents act as proof that a transaction has taken place.
  • Examples of source documents include receipts, invoices, bank statements, vouchers, debit and credit notes.

Double entry bookkeeping

  • This is an accounting concept which states that, a single transaction is recorded twice in the ledger, once on the debit side of the receiving account and once on the credit side of the giving account.

Ledger Account

  • A ledger account is a record of a transaction found in a ledger book.
  • Information from all books of prime entry is posted to the respective accounts in the ledger.

Purchases

  • These are goods, stocks or merchandise bought by the business with the intention of reselling them.
  • Purchases should not be confused with assets, assets are bought for use whereas purchases are bought for resell.
  • A car sales company trades in cars, hence its purchases will be in the form of cars. Likewise a supermarket trades in groceries, so its purchases will be in the form of groceries.

Sales

  • These are goods sold to customers.
  • Sales only include goods bought for resale (purchases).
  • Sale of fixed assets and other items in the business are not regarded as sales.

Expenses

  • Expenses are costs incurred by the business to carry on its operations.
  • This includes costs incurred in the maintenance of fixed assets.

Stock or inventory

  • Stock is the value of unsold goods of a business at particular trading period.
  • In accounting, they are two types of stock that is:
    • Opening stock - stock available at the beginning of a financial trading period.
    • Closing stock - stock at the end of a trading period.

Debtors or Accounts Receivables

  • Debtors are customers who buy goods or enjoy services on credit.
  • Debtors are classified under current assets in the balance sheet.

Creditors or accounts payables

  • A creditor is a person or business who is owed money for goods or services supplied.
  • Creditors are classified as current liabilities in the balance sheet.