Basic Accounting Terms | Class 11 Accountancy

1. Business Transaction - Business transaction refers to an economic event which changes the financial position of a business. 

• It is measured in monetary terms. 

• It causes a change in the value of assets, liabilities or capital of the business. 

• Examples include investing capital in the business, purchase of goods, sale of goods, payment of expenses etc. 

2. Capital - Capital refers to the amount of cash or assets invested by the owner in the business.

• It is an internal liability. It is a liability of business towards its owners. 

• Also termed as owner's equity or net worth.

• Capital = Assets - Outside liabilities

3. Drawings - Drawings refers to the amount of cash or goods withdrawn from the business by the owner for his or her personal use.

4. Liability - The amount which the business owes to outsiders. 

• Obligations to pay in future

Types of liabilities - 

1. Internal Liability - The liability of a business towards its owners. Capital is known as internal liability.

2. External Liabilities - The liability of a business towards outsiders. They include:

1. Non-current liabilities - Liabilities which are payable after one year. Examples: long term loan, debentures etc.

2. Current liabilities - Liabilities which are payable within one year. Examples: creditors, bills payable, outstanding expenses, bank overdraft etc. 

5. Asset - An asset is something which gives cash or benefit in future.

• includes resources or properties of the business

Types of Assets-

1. Non-current assets - Assets which are held by the business for a long period of time and not meant for resale. Examples include: fixed assets, non current investments etc.

Types of Fixed Assets:

1. Tangible Assets - Assets which have physical existence and can be touched or seen. Examples include land, building, plant, machine, computer, livestock etc.

2. Intangible Assets - Assets which do not have physical existence and can't be seen or touched. Examples include goodwill, patents, trademarks, computer software etc. 

2. Current assets - Assets which can be converted into cash or benefit within one year are known as current assets. Examples include: cash, bank balance, stock, debtors, bills receivables, prepaid expenses etc.

6. Revenue - Amount received from sale of goods and services. 

7. Expense - The cost incurred in production of goods and services for the selling purpose. 

• The cost incurred to generate revenue

• Examples include purchase, cost of goods sold/cost of sales, salary, rent, advertisement, stationery, bad debts, depreciation etc. 

8. Income - The excess of revenue over expense is known as income. 

9. Profit - The excess of total revenues over total expenses for an accounting period is called profit.

• Profit may be gross profit, operating profit or net profit. 

10. Gain - The profit which arises due to transactions which are incidental to the business.

1. Examples profit earned from sale of fixed assets

2. They are of non-recurring nature

11. Goods - The products in which the business is dealing. 

12. Purchases - The term 'purchases' is used only for purchases of goods.

13. Sales - The term 'sales' is used only for sales of goods.

14. Stock - Stock refers to goods remaining unsold at the end of the accounting year. 

15. Debtors - The person or firm to whom the business has sold goods on credit or provided services on credit. 

• The person or firm who owes money to the business. 

16. Creditors - The person or firm from whom the business has purchased goods on credit or procured services on credit. 

• The person or firm to whom the business owes money. 

17. Expenditure - The amount of money spent to acquire goods or services or assets. 

Types of expenditure

1. Capital expenditure - Expenditure incurred for acquiring fixed assets. 

Examples - purchase of furniture, plant, machine etc.

• Recorded as assets in balance sheet

2. Revenue expenditure - Expenditure incurred for meeting day to day operations of the business. 

Examples - purchase of goods and services, salary paid, rent paid etc. 

• Recorded as expense in the trading and profit and loss account

18. Voucher - The written document providing the evidence of a business transaction.