The most widely used definition is that it is “the process of identifying, measuring, and communicating the economic information necessary to make judgements and decisions by the users of the information”.
Users of Accounting information: The possible users of accounting information are:
a) Owners of the business
b) A prospective buyers of the business
c) The bank (if the owner wants to borrow money for use in the business)
d) Tax authorities
e) A prospective partner
f) Investors (The people who wish to invest their money in the business)
Definition of Book-keeping: The part of accounting that is concerned with recording data is known as book- keeping.
Terms used in Accounting
(1) Assets: Assets are resources owned by a business. Assets are classified into:
(a) Fixed assets: Fixed assets are assets kept in the business for a few years at least. Examples: land, premises, furniture, fixtures, buildings, fittings, plants, machineries, motor cars, motor vehicles, motor lorries, goodwill, mines, quarries, oil wells etc…
(b) Current assets: The assets which change its form from day to day are known as current assets. These are also known as circulating assets.
Examples: cash in hand, cash at bank, stock of goods, debtors, amounts prepaid, income accrued etc.
(2) Liabilities: The amounts of money a business must pay to its outsiders are known as liabilities. The term liability is divided into:
(a) Current liabilities: Those liabilities which are repayable within the near future are known as current liabilities. Examples: creditors, bank overdrafts, expenses owing, incomes received in advance etc.
(b) Long term liabilities: The liabilities which are repayable after a long period are known as long term liabilities. Examples: loan from bank, loan from other institutions and loan from any person.
(3) Account: Part of double entry records, containing details of transactions for a specific item. An account is drawn in ‘T’ form with two equal halves called debit side and credit side. The left hand side is called debit side and right hand side is called credit side.
(4) Capital: The amount of resources supplied by the owner is called as Capital. In accounting, capital is the excess of assets over liabilities. It is also known as net worth or owner’s equity.
(5) Working Capital: The excess of current assets over current liabilities [current assets minus current liabilities] is known as working capital.
(6) Debtor: The person who owes money to a business for goods or services supplied to him.
(7) Creditor: The person to whom money is owed for goods or services supplied by him.
(8) Drawings: Cash or goods withdrawn by the owner from the business for his personal use are known as drawings.
(9) Journal: The book where the first entry of every transaction is made. It is also known as book of original entry, day book or subsidiary book.
(10) Ledger: Ledger means a group of accounts.
(11) Purchases: means “the purchase of goods for the purpose of selling”
(12) Sales: means “ goods sold by the business, which were previously bought for resale”.
(13) Returns Inwards/ Sales returns: Goods returned to the business by its customers
(14) Return Outwards/Purchase returns: Goods returned by the business to its suppliers.
(15) Budget: It is a plan expressed in terms of money containing the details of how much we will spend and how much we will save from our business.
(16) Plan: It is an estimate for the future work which is usually not expressed in term of money.
Assignment Questions:
Select the correct answer:
Q. 1 The plan of how much we will spend and how much we will save from our
business is said to be:
(a) a budget (b) a plan (c) an account (d) a ledger.
Q. 2 The part of accounting that is concerned with recording data is often called:
(a) principles of accounts (b) definition of accounting
(c) balance sheet (d) book keeping
Q. 3 Resources in the business is said to be resources supplied by the:
(a) owner (b) debtor (c) creditor (d) money lender.
Q. 4 Owner’s equity is otherwise called
(a) net profit (b) total assets (c) working capital (d) net worth.
Q. 5 Which of the following is not a fixed asset?
(a) buildings (b) premises (c) cash balance (d) plants
Q. 6 Which of the following is a fixed asset?
(a) plants (b) debtors (c) cash balance (d) bank balance.
Q. 7 Which of the following is not a current asset?
(a) trade debtors (b) trade creditors (c) cash in hand (d) cash at bank
Q. 8 A financial plan expressed in money is called:
(a) a plan (b) an account (c) a ledger (d) a budget (e) none of these
Q. 9 A person to whom money is owed for goods or services is called the
(a) owner (b) borrower (c) debtor (d) creditor
Q. 10 The total amount of money owed for goods or assets supplied to a business is called
(a) assets (b) liabilities (c) equity (d) capital.
Q. 11 A person who owes money for goods or services supplied to him is called the
(a) owner (b) borrower (c) creditor (d) debtor.
Q. 12 Anything purchased for the purpose of resale is said to be
(a) sales (b) sales return (c) purchase
(d) purchase return (e) none
Q. 13 Goods returned by our customers are said to be
(a) sales return (b) purchase return
(c) sales (d) purchases
Q. 14 Goods returned to our suppliers are said to be:
(a) purchases (b) sales
(c) purchases return (d) sales return
Q. 15 Stock in trade is an example of
(a) an asset (b) a fixed asset (c) a current asset (d) a floating asset
Q. 16 The person who buys goods from a business on credit is called the
(a) owner (b) creditor (c) debtor (d) supplier
Q. 17 The person who contributes money to the business is known as its
(a) debtor (b) creditor (c) owner (d) supplier
Fill in the following with the correct terms
1) Bank overdraft is an example of a ————- —————-.
2) Capital is also known as ——————
3) The person who owes money to a business is known as ——————–.
4) The person to whom money is owed for goods or services is known as————–
5) The total of resources supplied to a business by its owner is known as ——————
6) The assets kept in the business for a long period is known as ——————–
7) Cash at bank is an example of —————————
8) Premises is an example of ————– asset
9) The part of accounting that is concerned with recording data is known as ————
10) In accounting, ———————- means goods sold by the business which
were previously brought for resale.
11) In accounting, purchase means the purchase of goods for the purpose of ————–
12) Drawings mean —————- or ————— taken by the owner for his ———–
—————-
13) Liabilities can be current liabilities and ————– ——————— —————
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