Explanation of important Accounting terms

Assets

An asset may be defined as anything of use to future operations of the enterprise and belonging to the enterprise. For example, building, land, machinery, cash, debtors (amount due from customers) goodwill etc.

Equity

In broad sense the term equity refers to total claims against the enterprise. It is further divided into two categories:
(i) Owners claim-capital and
(ii) Outsiders' claim-liability.

(i) Liability: Amounts owed by the enterprise to the outsiders i.e. to all others except the owner. For example, trade creditors, bank overdraft etc.
(ii) Capital: The excess of assets over liabilities of the enterprise. It is the difference between the total assets and the total liabilities of the enterprise. For example, if on a particular date the assets of the business amount to Rs. 1,00,000 and liabilities to Rs. 30,000 then the capital on the date would be Rs. 70,000. It is also known as net worth.

Revenue

It is the monetary value of the products or services sold to the customers during the period. It results from sales, services and sources like interest, dividend and commission, etc.

Expenses/ Costs

Expenditure incurred by the enterprise to earn revenue is termed as expenses or costs. Distinction between expense and asset is that the benefit of the former is consumed by the business in present whereas in latter case benefit will be available for future activities of the business. Examples of expenses are raw materials consumed, salaries etc. .

Loss

The term is used to convey, at least, two different meanings. First it refers to the result of the business for a period when expense exceed the revenue. For example, if sales are Rs. 10,000 and expenses are Rs. 11,000 the loss will be Rs. 1,000. Second- It describes those efforts which fail to earn revenue. For example-un saleable stock, loss due to fire, theft, accident etc.

Proprietor/ Owner

The person who invests his money or money's worth and bears the risk of the business.

Drawings

Money or value of goods belonging to business used by the proprietor for his personal use.

Goods

Includes all merchandise commodities which are purchased by the business for selling.

(Trade) Debtor

Person who owes money to the business. It happens when goods are sold on credit.

(Trade) Creditor

Person to whom the business owe money. It happens when goods or materials are purchased by the business on credit.

Transaction

Any exchange (dealing) of goods or services, for cash or on credit by the business with any other business.

Events

There are the occasions which cause changes in the value due to time element. Outsiders are not directly concerned. For example, interest accrued, depreciation in the value of assets etc.

Entry

The record of a transaction or event in the books of accounts is known as entry.

Entity

All elements of financial statements are in relation to a particular entity which may be business enterprise, an educational or charitable organization, a government unit, a natural person or the like. An entity may comprise two or more affiliated entities and may not necessarily correspond, with 'legal entity'. Thus, the accounting information is recorded, compiled and presented with reference to identifiable entity. The term 'other entity' refers to a subsidiary company that is a part of the same entity as its parent company in consolidated financial statements but is an 'other entity' in the separate financial statements of its parent.

Net worth

Is also known as "ownership equity" or "stockholders', equity" or "capital". It is the difference between total assets minus outside liabilities. Alternatively net worth is the sum of capital plus retained earnings.