Introduction to Accounting and Basic Accounting Terms

Comprehensive vocabulary flashcards covering the meaning, objectives, characteristics, branches, and basic terminology of accounting as presented in the lecture notes.

Accounting

A systematic process of measuring, recording, classifying and summarising the financial transactions, analysing and interpreting the financial statements and communicating the results to the users.

American Institute of Certified Public Accountants (AICPA) definition

The art of recording, classifying and summarising in a significant manner and in terms of money; transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.

The Institute of Chartered Accountants of India (ICAI) definition

The art of recording, classifying, summarising and interpreting financial transactions and events in monetary terms enabling informed decision-making, making it the language of business.

Identifying Financial Transactions and Events

The process of identifying transactions that can be measured in money terms for recording in the books of account based on evidence like purchase bills and sale invoices.

Measuring the Identified Transactions

The process of measuring transactions and events in terms of a common measuring unit, such as the Indian Rupee ($₹$) in India.

Recording

The process of recording transactions of financial character in the book of original entry, known as the Journal.

Classifying

The process of transferring or posting recorded transactions from the Journal to individual account heads in the main book of accounts called the Ledger.

Summarising

Presenting classified data in an understandable manner through the preparation of a Trial Balance, Trading and Profit & Loss Account, and Balance Sheet.

Final Accounts (Financial Statements)

The collective name for the Trading and Profit & Loss Account (or Statement of Profit & Loss for companies) and the Balance Sheet.

Analysis and Interpretation

Establishing relationships between items in financial statements and explaining their significance so users can assess profitability and financial position.

Communicating in Accounting

Sharing financial information and statements with users in a timely manner to facilitate appropriate decision-making.

Financial Accounting

A branch of accounting that deals with maintaining books of accounts to determine financial performance (profit or loss) and the financial position of a business.

Cost Accounting

A branch of accounting concerned with recording, ascertaining, reducing, and controlling costs for goods manufactured or services rendered.

Management Accounting

A branch of accounting focused on generating information related to funds, costs, and profits to enable the management to make decisions.

Book Keeping

A part of accounting involving the identification, measurement, recording, and classification of financial transactions in the books of account.

Accountancy

The entire body of the theory and practice of accounting; it provides the systematic knowledge of rules and principles for recording and communicating financial information.

True and Fair

The fundamental qualitative characteristic of accounting information.

Reliability

A qualitative characteristic meaning accounting information is verifiable, free from bias, and free from material error.

Relevance

A qualitative characteristic where information meets the needs of users to enable informed decision-making.

Understandability

A qualitative characteristic where financial information is presented in a manner that users can comprehend.

Comparability

A qualitative characteristic allowing users to compare an enterprise's information across periods (intra-firm) or with other enterprises (inter-firm).

Intra-firm Comparison

Comparing the accounting information of an enterprise from one period with that of its own previous periods.

Inter-firm Comparison

Comparing the accounting information of one enterprise with that of other enterprises.

Internal Users

Users like Owners and Management who have access to micro-level accounting records for decision-making.

External Users

Users like Employees, Banks, Investors, Creditors, and Government authorities who rely on published financial statements rather than internal records.

Double Entry System

A system based on the Dual Aspect Concept that records both the debit and credit aspects of every financial transaction.

Single Entry System

An incomplete Double Entry System, often called Accounts from Incomplete Records, where only Personal Accounts and a Cash Book are typically maintained.

Entity

An economic unit that performs economic activities; it can be a business entity (enterprise) or a non-business entity (not-for-profit).

Business Transaction

A financial event expressed in money terms involving an exchange of values between two parties that changes the financial position of an enterprise.

Account

A record of transactions under a particular head (asset, liability, expense, etc.) showing amounts and their effect/direction.

Capital

The amount invested in an enterprise by the proprietor or partners, also known as Owner's Equity or Net Worth, calculated as $Capital = Assets - Outside\,Liabilities$.

Drawings

The amount of money, goods (valued at cost), or assets taken by a proprietor or partner for personal use, which reduces their capital.

Internal Liability

The liability of a firm toward its owners or proprietors, primarily represented by Capital.

External Liability

Liabilities arising from credit transactions or loans owed to outsiders, such as bank loans, creditors, and bills payable.

Non-current Liability

A long-term liability payable after a period of more than $12\,months$ from the date of the Balance Sheet.

Current Liability

A short-term liability payable within $12\,months$ from the date of the Balance Sheet.

Operating Cycle

The time between the acquisition of an asset for processing and its conversion into Cash and Cash Equivalents; defaults to $12\,months$ if not identifiable.

Assets

Properties (tangible or intangible) and valuable resources owned or controlled by an entity that provide future economic benefit.

Fixed Assets

Non-current assets held for long-term use in business operations or to increase earning capacity, rather than for resale.

Tangible Assets

Assets with physical existence that can be seen and touched, such as land, building, machinery, and furniture.

Intangible Assets

Assets without physical existence that cannot be seen or touched, such as patents, goodwill, and trademarks.

Current Assets

Assets held for the purpose of being converted into cash within a short period, usually $1\,year$.

Fictitious Assets

Expenses or losses not written off in the year they were incurred, but written off over multiple periods (e.g., Deferred Revenue Expenditure).

Capital Expenditure

Expenditure incurred to acquire or improve assets that increase the earning capacity of the business and provide benefits beyond one accounting period.

Revenue Expenditure

Expenditure where the benefit is consumed or exhausted within a single accounting period, such as salaries, rent, and cost of goods sold.

Deferred Revenue Expenditure

A revenue nature expense written off over more than one period because its benefit is expected to last multiple years (e.g., large advertising spend).

Expense

The cost incurred for earning revenue, such as cash payments for wages, depreciation of fixed assets, or bad debts.

Prepaid Expense

An expense paid in the current accounting period but relating to a future financial year.

Outstanding Expense

An expense incurred during the current accounting year that remains unpaid at the end of the year.

Revenue

The gross inflow of cash or receivables arising from ordinary activities like the sale of goods, rendering of services, or use of entity resources by others.

Income

The excess of revenue and other income over expenses for an accounting period ($Income = Revenue + Other\,Income - Expense$).

Profit

Income earned specifically from the operating activities (business activities) of an enterprise.

Gross Profit

The difference between revenue from sales/services and their direct costs.

Net Profit

The profit remaining after deducting all (direct and indirect) expenses from total revenue and other income.

Gain

An increase in owner's equity resulting from irregular or non-recurring transactions incidental to business, such as the sale of land or machinery.

Loss

The excess of expenses over total revenue; it also refers to money's worth lost without benefit, such as theft or fire.

Purchases

Refers to the acquisition of raw materials for manufacturing or goods for resale, including both cash and credit transactions.

Purchases Return (Returns Outward)

The return of goods purchased to the seller, often due to defects.

Sales

The transfer of ownership of goods to customers for a price, including both cash and credit sales.

Sales Return (Returns Inward)

Goods sold that are subsequently returned by the purchaser.

Revenue from Operations

The net amount (Sales minus Sales Return) received or receivable from an enterprise's business activities.

Goods

Items of trade purchased or manufactured specifically for the purpose of sale; the Stock-in-Trade of an enterprise.

Stock (Inventory)

A current asset consisting of goods remaining unsold or unused in manufacturing as of a particular date.

Work-in-Progress

Stock consisting of partly finished goods currently in the process of being manufactured.

Trade Receivables

The sum total of Debtors and Bills Receivable arising from the sale of goods or services in the ordinary course of business.

Debtor

A person or entity who owes an amount to the enterprise for goods sold or services rendered on credit.

Bill Receivable

A Bill of Exchange accepted by a debtor, the amount of which is to be received on a specified date.

Trade Payables

The sum total of Creditors and Bills Payable for goods or services purchased in the normal course of business.

Creditor

A person or enterprise to whom the business owes money for goods or services purchased on credit.

Bill Payable

A Bill of Exchange accepted by the enterprise, the amount of which is to be paid on a specified date.

Voucher

An evidence of a business transaction; it includes Source Vouchers (e.g., cash memos) and Accounting Vouchers (showing heads to be debited/credited).

Trade Discount

A reduction in price allowed by a seller when goods are bought in specific quantities or values; it is not recorded separately in books of account.

Cash Discount

A reduction in the amount payable or receivable allowed for making a payment within the agreed time; it is recorded in the books of account.

Rebate

A reduction in sale value allowed for reasons other than trade or cash discount, such as poor quality or excess supply.

Bad Debts

Amounts receivable that are written off because they have become irrecoverable; it is a loss for the enterprise.

Book Value

The value at which an asset appears in the books of account, representing $Cost - Depreciation$.

Depreciation

The systematic allocation of the cost of a fixed asset over its estimated useful life due to use, time, or obsolescence.

Insolvent

A person or enterprise that is not in a position to pay its debts.

Solvent

A person or enterprise that is in a position to pay its debts.

Entry

A business transaction or event once it is recorded in the books of account.