Basic concepts of Accounting terms 2

Some important Terms of Accounting (Lecture 2)

Types of goods in Business

There are two main types of goods in the business, these are given following.

· Goods for use

All the goods those are not purchased for the purpose of business or for selling. Such type of things is called goods for use.

The type of things is shown in the books of accounts with their original names. Such as furniture, building, car ……..

· Goods for Sale/Goods/ Merchandise

It includes all merchandise commodities which are purchased by the business for the purpose of selling.

There are four main types of merchandise at different stages of business.

Purchases

Cash purchase

Credit purchase or Purchase on Account

Purchases Returns

Sales

Cash sales

Credit Sales

Sales Returns

Purchases

In accounting language the word “Purchases” has a special meaning. When saleable goods are bought in a business it is said that “Purchases have been made.

Example

Whenever the cloth dealer purchases cloth it is not necessary to mention that cloth has been purchased (simply it will be said that the purchases have been made).

On the other hand if stationary is purchased, by the cloth dealer then it will be essential to mention that stationary has been purchased. Because stationary is not purchased for the purpose of selling, this is for the purpose of use in the business thus it will be shown in the books of accounts with its original name.

There following two main types of purchases.

· Cash purchases

If the goods are purchased form the supplier and payment is made to at the same time, such purchases are known as “Cash purchases”

Example

Mr. A purchased goods form a seller, Mr. Y, for Rs 5000 on 1st May, 2009 and the payment is made to the seller (Mr. Y) at the same date (1-05-2009) it will be a case of cash purchases.

· Credit Purchases OR Purchases on Account

When goods are purchased from a seller and payment is not made to him at the same time, rather the payment is arranged to be made at some future date, such purchases are known as ”credit purchases” or “purchases on Account”

Example

Mr. A purchased goods from Mr. B for Rs 5000 on 1^st January, 2009 and Mr. A agreed to make the payment of goods on 15^th January, 2009 (payment has not been made on 1.1.2005) it will be the case of credit purchase .On 15^th January Mr. A will pay Rs 5000 to Mr. B.

Ø Purchase Returns OR Returns Outwards

If goods Purchased are found defective or unsatisfactory, they are some times returned to the persons from whom they are purchased or to suppliers are called “purchases returns” OR “Returns Outwards”

Example

for example, we purchased 100 radio sets (goods) from Lahore Electronics for Rs 15000. On Receiving the Delivery of goods, it is found that 10 Radio sets are of inferior quality. The return of these 10 radios sets to the seller (Lahore Electronics) will be a case of purchases returns.

I will explain about sales, its kinds and sales returns in the next post.

Please give your comments and suggestions for this post in the comment section. I’ll keep your suggestions in my mind while drafting next post

Basic concepts of Accounting terms 1

Definitions of Accounting

Many authors have defined the term “Accounting” in different ways. There is difference of opinions among the authors as to its precise definition as the term accounting is so broad that it is difficult to give a precise definition. However, several possible definitions are given following.

1. “The act of collecting ,processing, reporting analyzing, interpreting and projecting financial information”

2. “The system of providing qualified information about an organization to people who need such information “

3. “The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.”

Some Important Terms of Accounting

Before attempting to learn the art or science of book keeping it will be better to clarify some of the terms that will be used again and again.

Business

It includes any activity undertaken for the purpose of earning profit.

Examples Banking Transactions, an insurance business, a merchandise business etc.

Proprietor

The owner of the business is called proprietor. He invests capital in it, gives his time and attention to it.

He is entitled to receive the profit or bear loss arising out of it.

Assets

These are the things of value possessed by a trader such as building, land, machinery, furniture ……..

Following points are the characteristics of Assets

Ø Owned (owner has legal title to Asset)

Ø Provide benefits now and in future.

Equity

A claim which can be enforced against the assets of the firm is called equity. In other words the rights to properties are called equities

Equities are of two types

Ø The right of creditors

The equities of creditors represent debts of the business and are called liabilities.

Ø The right of owners

The equities of the owners is called capital, proprietorship or owner’s equity

Liabilities

Liabilities are the debts or obligation of the business.

The outsiders (creditors) claims against the assets of the business are known as Liabilities.

There are following two main parties who have claims against the assets of the business.

· Outsider’s claim

Outsider’s claims against the assets of the business are known as “liabilities”

· Owner’s Claim

The owner’s claim against the assets of business is known as owner’s equity

OR

Liabilities mean the total amount which a business is legally bound to pay to the outsiders e.g. creditors, bill payables, Accounts payable , Bank loans etc.

The relationship between the ownership, liabilities and assets could be explained from the following equation.

Assets =liabilities + Owner’s equity