CBSE Class 11 - Accountancy - Chapter 1 - Understanding Basic Terms (#cbsenotes)(#eduvictors)

Accountancy - Chapter 1 -
Understanding Basic Terms

Business transaction

An economic activity that affects the financial position of the business and can be measured in terms of money, e.g., the purchase of goods for use in the industry.

Account

An account refers to a summarised record of relevant transactions for a particular head at one location. All accounts are divided into two sides. The left side of an account is referred to as the debit side, and the right side is referred to as the credit side.

Capital

The amount invested by the owner in the firm is known as capital. It may be bought in the form of cash or assets by the owner.

Drawings:

The money or goods or both withdrawn by the owner from the business for personal use is known as drawings. Example: purchasing a car for personal use by withdrawing money from a business account.



Assets

Assets are valuable economic resources of an enterprise that are useful in its operations. Assets can be broadly classified as:

1. Current assets: Current assets are those assets which are held for a short period and can be converted into cash
within one year. For example, debtors, stock, and so on.

2. Non-current assets: Non-current assets are those assets which are held for an extended period and used for normal business operations. For example, land, buildings, machinery, and so on. They are further classified into:

a) Tangible assets: Tangible assets are those assets which have physical existence and can be seen and touched. For example, furniture, machinery, and other items.

b) Intangible assets: Intangible assets are those assets which have no physical existence and cannot be felt by an operation. For example, goodwill, patent, Trademark, etc.

Liabilities:

Liabilities are obligations or debts that an enterprise is required to pay at some point in the future.

Liabilities can be classified as:

1. Current liabilities: Current liabilities are obligations or debts that are payable within a period of one year.
For example, creditors, bills payable, and other similar accounts.

2. Non-current liabilities: Non-current liabilities are those obligations or debts that are payable after a period of one year.
Example: bank loan, debentures, etc.


Receipts

1. Revenue receipts: Revenue receipts are those receipts that occur by the regular operation of the business, such as money received from the sale of business products.

2. Capital receipts: Capital receipts are those receipts that occur other than by a business operation, such as money received by the sale of fixed assets.

Expenses

Costs incurred by a business for earning revenue are known as expenses. For example, rent, wages, salaries, interest, and other similar expenses.

Expenditure

Spending money or incurring a liability for acquiring assets, goods or services is called expenditure. The expenditure is classified
as:

1. Revenue expenditure: If the benefit of expenditure is received within a year. It is called revenue expenditure. For example, rent, interest, and other similar expenses.

2. Capital expenditure: If the benefit of the expenditure is received for more than one year, it is called capital expenditure. Example purchase of machinery.

3. Deferred revenue expenditure: There are certain expenditures which are revenue in nature but the benefit of which is derived over a number of years. For example, a huge advertisement expenditure.

Profit

The excess of revenues over its related expenses during an accounting year is profit.

Profit = Revenue - Expenses

Gain

A non-recurring profit from an event or transaction incidental to business, such as a sale of fixed assets, appreciation in the value of an asset, etc.

Loss

The excess of expenses over a period's related revenue is termed a loss.

Loss = expense - revenue

Goods

The products in which the business deals, the items that are purchased for the purpose of resale and not for use in the business, are called goods.

Purchase

The term 'purchase' is used only for goods procured by a business for resale. In the case of trading concerns, it involves the purchase of final goods, while in manufacturing concerns, it entails the purchase of raw materials. Purchases can be made with cash or credit.

Purchase return

When purchased goods are returned to the suppliers, these are known as purchase returns.

Sales

Sales refer to the total revenues generated from goods sold or services provided to customers. Sales can be made through cash transactions or credit transactions.

Sales return

When sold goods are returned to the seller by the customer for any reason, it is referred to as a sales return.


Debtors

Debtors are individuals and/or other entities to whom the business has sold goods and services on credit, and the amount has not yet been received. These are assets of the business.

Creditors

If the business buys goods/services on credit and amount is still to be paid to the persons and [or other entities, these are called creditors. These are liabilities for the business.

Bill receivable

Bill receivable is an accounting term for a bill of exchange. A bill of exchange is a bill receivable for the seller at the time of a credit sale.

Bill payable

Bill payable is also an accounting term for a bill of exchange. A bill of exchange is a bill payable to the purchaser at the time of credit purchase.

Discount

A discount is the rebate given by the seller to the buyer. It can be classified as:

1. Trade discount: The purpose of this discount is to persuade the buyer to buy more goods. It is offered at a specified percentage of the list price at the time of sale. This discount is not recorded in the accounting books as it is deducted in the invoice/cash memo.

2. Cash discount: The objective of providing a cash discount is to encourage the debtors to pay the dues promptly. This discount is
recorded in the accounting books.

Account

An account refers to a summarised record of relevant transactions for a particular head at one location.

Income

Income is a broader term which includes profit as well. Income refers to an increase in the wealth of an enterprise over a specified period.

Stock

The goods available for sale by the business on a particular date are known as stock.

Cost

Cost refers to the expenditures incurred in acquiring manufacturing and processing goods to make them saleable.


Voucher

The documentary evidence supporting a transaction is known as the voucher. For example, if we buy goods for cash, we receive a cash memo; if we buy goods on credit, we receive an invoice; and when we make a payment, we receive a receipt.

Question 1. Mr. Gopal started a business for buying and selling readymade garments with an initial investment of ₹ 8,00,000. Out of this, he paid ₹4,00,000 for the purchase of garments, ₹50,000 for furniture, and ₹50,000 for computers, and the remaining amount was deposited in the bank. He sold some of the ladies' and kids' garments for ₹3,00,000 for cash and some garments for ₹1,50,000 on credit to Mr Rajesh. Subsequently, he bought men’s garments for ₹2,00,000 from Mr. Satish. In the first week of the next month, a fire broke out in his office, destroying a stock of garments worth ₹1,00,000. Later on, some garments which cost ₹1,20,000 were sold for ₹1,30,000. Expenses paid during the same period were ₹15,000. Mr Gopal withdrew ₹20,000 from his business account for personal use. From the above, answer the following:

1. What is the amount of capital with which Mr Gopal started the business?
2. What fixed assets did he buy?
3. What is the value of the goods purchased?
4. Who is the creditor, and state the amount payable to him?
5. Who is the debtor, and what is the amount receivable from him?
6. What is the total amount of expenses?
7. What is the amount of drawings that Mr Gopal has?


Answer:
1. The initial capital introduced by Mr Gopal for starting the business of “Readymade Garments” is ₹8,00,000.

2. He purchased two Fixed Assets, i.e., Furniture and Computer. Therefore,
Total Fixed Assets bought by him = Furniture + Computer
= ₹50,000 + ₹50,000 = ₹1,00,000

3. Value of the goods purchased by Mr. Gopal (Proprietor) = Purchase of Garments + Purchase of Men’s Garments
=    4,00,000 + 2,00,000
= ₹6,00,000

4. The creditor of the business is Mr Satish with ₹2, 00,000 is payable to him.

5. The debtor of the business is Mr Rajesh, with ₹1,50,000 being the amount to be received from him.

6. The total amount of expenses is ₹15,000.

7. The amount of drawings of Mr Gopal is ₹20,000.



☛See also:
Chapter 1: Basic Terms
Accountancy Sample Question Paper (2016-17)