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., purchase of goods for use
in business.

Account

Account refers to a summarized record of relevant transaction of a particular head at one place. All accounts are divided into two sides. The left side of an account is called debit side and the right side of an account is called the credit side.

Capital

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The money or goods or both withdrawn by the owner from business for personal use is known as drawings.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



Assets

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

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

2. Non-current assets: Non-current assets are those assets which are held for long period and used for a normal business operation. For example land, building, machinery etc. 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 etc.

b) Intangible assets: Intangible assets are those assets which have no physical existence and can be felt by an operation. For example goodwill, patent, Trademark etc.


Liabilities:

Liabilities are obligations or debts that an enterprise has to pay after some time in the future,

Liabilities can be classified as:

1. Current liabilities: Current liabilities are obligation or debts that are payable within a period of one year.
For example creditors, bill payable etc.

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 which are occurred by normal operation of business like money received by sale of business products.

2. Capital receipts: Capital receipts are those receipts which are occurred by other than a business operation like money received by sale of fixed assets.

Expenses

Costs incurred by a business for earning revenue are known as expenses, For example, rent, wages, salaries, interest etc,

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 etc.

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 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 event or transaction incidental to business such as a sale of fixed assets, appreciation in the value of an assets etc.

Loss

The excess of expenses of a period over its related revenue is termed as the loss.

Loss = expense - revenue

Goods

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

Purchase

The terms purchase is used only for the goods procured by a business for resale. In case of trading concerns it is a purchase of final goods and in manufacturing concern, it is the purchase of raw materials. Purchases may be cash purchases or credit purchases.

Purchase return

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

Sales

Sales are the total revenues from goods sold or serviced provided to customers. Sales may be cash sales or credit sales.

Sales return

When sold goods are returned from the customer due to any reasons is known as sales return.


Debtors

Debtors are persons and/or other entities to whom the business has sold goods and services on credit and amount has not received yet. 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 of the bill of exchange. A bill of exchange is bill receivable for the seller at the time of credit sale.

Bill payable

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

Discount

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 an agreed percentage of list price at the time of selling goods. 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 cash discount is to encourage the debtors to pay the dues promptly. This discount is
recorded in the accounting books.

Account

Account refers to a summarised record of relevant transactions of a particular head at one place.

Income

Income is a wider term, which includes profit also. Income means an increase in the wealth of the enterprise over a period of time.

Stock

The goods available with the business for sale on a particular date is known as stock.

Cost

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


Voucher

The documentary evidence in support of a transaction is known as the voucher. For example, if we buy goods for cash we get cash memo, if we buy goods on credit, we get an invoice, when we make payment we get a receipt.

Question 1. Mr. Gopal started a business for buying and selling of readymade garments with ₹8,00,000 as an initial investment. Out of this, he paid ₹4,00,000 for the purchase of garments and ₹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 of ₹2,00,000 from Mr. Satish. In the first week of the next month, a fire broke out in his office and stock of garments worth ₹1,00,000 was destroyed. 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 business for his domestic 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 are 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 of Mr Gopal?


Answer:
1. 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. 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)