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