Module 1 Chapter 1 Certain terms used in book-keeping:

Business transaction: A business transaction refers to any activity, dealing or event which has value measurable in terms of money and which involves exchange (i.e., transfer of money or moneys worth (i.e. some value or benefit)between the business and any other person, including the proprietor of the business, dealing with the business. Types of business transaction: There are four types of business transaction. They are: a) Cash transaction: It refers to any business transaction which involves immediate payment or receipt of cash. Eg. Purchase of goods for cash, sale of goods for cash, purchase of furniture or nay other asset, payment of an expense, receipt of an income etc. b) Credit transaction: It refers to a business transaction where the payment or the receipt of money is postponed to a future date. Eg. Purchase of goods on credit, sale of goods on credit, purchase of an asset on credit, interest on loan due to the lender, an outstanding expense, etc. c) Barter transaction: It is a business transaction where receiving of something and giving of something take place simultaneously but there is no exchange of cash. Eg. Sale of furniture in exchange of purchase of typewriter, giving of goods for furniture purchased, giving of goods to an employee in settlement of his salaries etc. d) Non-cash transaction or paper transaction: It is a business transaction where there is no payment or receipt of cash either immediately or at a

future date. E.g. depreciation on any fixed asset, bad debts written off loss of goods by fire etc. Goods: It refers to merchandise, commodities, products, articles or things in which a trader deals. In other words, they refer to commodities or things meant for resale. Classification of goods: a) purchases: Goods purchased by a business are called purchases b) Sales: Goods sold by a business are called sales. c) Purchases returns, returns outwards or returns to suppliers: Goods returned by a business to its suppliers out of the purchases already made from them are called purchases returns. d) Sales returns, returns inwards or returns from customers: goods returned to a business by its customer out of the sales already made to them are called sales returns. e) Opening stock: Unsold goods lying in a business of any given period say at the beginning of a year are called opening stock. f) Closing stock: unsold goods lying in a business at the end of any given period say at the end of a year are called closing stock. Assets: the word asset is derived from the French word assez which means enough. So, asset, means enough or sufficient things of value owned by a concern for carrying on the business. In other words, assets refer to things or rights of value owned by a business and also debts due to the business from others. Assets include: a) Physical or real properties or things called tangible assets like lands, buildings, machinery, vehicles ,furniture, stock of goods, cash etc owned by a business. b) Rights in certain things or certain rights having money value called intangible assets, such as goodwill, patent right or patents, trade marks and copy rights possessed by the business.

c) Debts(i.e. amounts)due to the business from others e.g. sundry debtors, bills receivable, prepaid expenses, outstanding incomes etc.

Liabilities: the word liability is derived from the French word lier which mean means to bind. So, liability means claims of others against a business which bind the business or makes the business indebted to others. It means debts or amounts due from a business to other either for money borrowed or for goods or assets purchased on credit or for services received on credit. E.g. loan borrowed, bank overdraft, creditors, bills payable, outstanding expenses etc. Owners capital or capital: it is the amount that is money or money worth with which the proprietor has started his business. It is the net worth or net assets of the business which belong to the owner. It is the excess of the assets over the liabilities which belong to the owner. Drawings: refer to cash, goods or any other asset withdrawn (taken away) by the proprietor from his business for his personal or domestic use. It also includes the personal or domestic expenses of the proprietor paid by the business Debtor: a Debtor is a person who owes money to the business. He owes money to the business because he has received some benefit from the business. A debtor constitutes an asset for the business. A debtor may be a trade debtor, a loan debtor, a debtor for an asset sold on credit or debtor for the service rendered on credit. Debt: the amount due from a debtor to the business is called a debt. Book debt: it is the same as debt. It is called so as it is the amount due from the debtor as per the books of account.

Good debt: it refers to fully recoverable debt. Bad debt: a debt which is irrecoverable is called a bad debt. Doubtful debt: a debt whose recovery is doubtful is called a doubtful debt. Creditor: He is a person to whom the business owes money. The business owes to him, because he has given some benefit to the business. A creditor constitutes a liability for the business. A creditor may be a trade creditor, a loan creditor, a creditor for an asset purchased on credit and expense creditor Solvent: A businessman is said to be solvent, when he is able to pay his liabilities in full (that is when his assets exceed his liabilities) Insolvent: a businessman is considered to be insolvent, when he is not able to pay his liabilities in full, that is, when his assets are less than his liabilities. Revenue or income: it refers to the earnings of a business. It includes the sale proceeds of goods, receipts for services rendered and earnings from interest, dividend, rent, commission, discount etc. Expense: An expense refers to an expenditure in return for which some benefit is received and the benefit received is enjoyed and exhausted immediately. E.g. cost of goods sold, salaries, printing and stationery, postage and telegram, rent, interest, commission etc. Loss: refers to money or moneys worth given up without any benefit in return. In other words, it refers to any expenditure in return for which no benefit is received. For e.g. Loss of goods by fire, loss of cash by theft, damages paid to others etc. On account: The term on account may mean:

a) Purchase or sale of goods or an asset on credit b) Receipt or payment of money in part settlement of an existing account c) Receipt or payment of money on account of previous dues receivable or payable. Debit: The term debit has been derived from the latin word debere which means to owe. So literally the term debit means the amount owed by an account for the benefit received by that account. In short, it means the benefit received by an account. Credit: The term credit has been derived from the latin word credere which means to believe. So literally the term credit sometimes known as reward or discharge means the amount owed to an account for the benefit given by that account in the belief that its value will be returned at a later date. In short, it means the benefit given by an account. Account: The term account or its abbreviation A/C or an a/c refers to a summarized record of all the transactions relating to particular person, thing or a service which have taken place during a given period of time. Books of accounts: It refers to suitably ruled account books in which business transactions are recorded. There are two types of books of accounts maintained by a business concern. They are: A) Journal: A journal is a daily record of business transactions. It is a book of original, prime or first entry in which all the business transactions are first entered in the specified manner in the order of dates. It maintained under the theoretical system of book keeping. B) Subsidiary books: these are sub-divisions of the journal or special journals where business transactions are first recorded. They are also books of

original, prime or first entry. They are maintained under the practical or modern system of book-keeping. C) Ledger: a Ledger is an account book in which all the accounts are maintained. It contains all the accounts of a business in a well arranged form. It is a book of final entry in the sense that all the transactions are finally recorded in the ledger. It is the principal, chief or main book of accounts. It is from this book that a businessman can obtain the final information relating to his business. Entry: It refers to the record of a transaction made for the first time Journal entry: an entry in the journal is called a journal entry. Journalizing: refers to the recording of a transaction in the journal, or passing a journal entry Narration: It is a brief explanation to a journal entry, given below the journal entry, within brackets. It indicates the purpose of the journal entry. It explains the reasons for debiting one account and crediting another account in the journal entry. Ledger entry: an entry in the ledger is called a ledger entry. Posting: It is the process of entering in the ledger the information already recorded in the journal or in any of the subsidiary books. In other words, it is the transfer of an entry from the journal or from a subsidiary book to the ledger. It is made periodically i.e., weekly, fortnightly or monthly, depending upon the convenience of the business concern. Voucher: It refers to any written document in support of a financial transaction. It is a proof that a particular transaction has taken place for the value stated therein. Receipt: It is a written acknowledgement of the receipt of money or the acceptance of the delivery of goods given by the receiver of money or goods to the giver of money or goods.

Folio:It means the page of a journal or a ledger. Folioing or paging:Entering the folio(i.e the page)number of the journal in the ledger, and the folio number of the ledger in the journal is called folioing. Folioing serves as cross reference between the journal and the ledger, and helps in tracing the entries from the journal to the ledger or from the ledger to the journal. Further, it helps the clerk engaged in posting to see that no entry in the journal remains unposted. Carried forward: abbreviated as c/f is used at the bottom of a page (of a journal or a ledger)to indicate that the total amount at the foot of that page has been carried forward to the head (top)of the next page. Brought forward: abbreviated as b/f is used at the head of a page (of a journal or ledger) to indicate that the total amount at the head of that page has been brought forward from the foot of the previous page. Carried down: abbreviated as c/d is written in a ledger account at the time of its closing to indicate that the balance in that account has been carried down to the next period. Brought down: abbreviated as b/d is written in a ledger account at the time of its opening to indicate that the opening balance in that account has been brought down from the previous period.

Classification of accounts or kinds of accounts: There are three classes of accounts viz., 1. Personal accounts:These are accounts of persons with whom a concern carries on business. Personal accounts may be: a) Accounts of natural or physical persons-i.e., accounts of human beings e.g Rams account, Rahims account etc. b) Accounts of artificial or legal persons i.e., accounts of partnership firms, companies, clubs, associations, banks, government institutions, schools

and colleges etc. E.g. State Bank of Indias account, Kristu Jayanti Colleges account, Income-tax Department account, BESCOM a/c etc c) Representative personal accounts: These accounts are called representative personal accounts as they represent certain persons behind them. For e.g. outstanding wages account represents all those workers to whom wages are to be paid. 2. Real, Asset or property accounts: Are accounts of properties, assets or things owned by a concern and with which the business is carried on. Real accounts may be: a) Accounts of tangible assets (assets which have physical existence and which can be seen, touched, felt, bought and sold) such as goods account, cash account, furniture account, vehicles account, machinery account buildings account etc. b) Accounts of intangible assets(assets which do not have physical existence and which cannot be seen and touched but can be bought nd sold)such as goodwill account,patent rights account, copy rights account etc. 3. Nominal or fictitious accounts:Are accounts of the expenses and losses which a concern incurs and incomes and gains which a concern earns in the course of its business. These accounts are called nominal accounts because they do not really exist and they cannot be seem or touched. They are not represented in any type of tangible or visible things or assets. They exist only in names.

Rules of debit and credit

Name of the accounts Personal account Real account Nominal account

Debit The receiver What comes in All expenses and

Credit The giver What goes out All incomes and

losses

gains

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