CHAPTER 8: TERMS USED IN BUSINESS ACCOUNTING

To start and operate a business, a lot of transaction takes place. Some are in cash and others are in credit.
After doing a business for a year, we need to judge the performance of our business activities by
calculating profit or loss or by comparing the changes in assets over the year or the changes of amount of
money we get from other people and the amount of money other businesses will get from us or analyzing
all of them altogether. To make the analysis, business needs information and to get the information we
need to a follow a proper system to record our daily transactions so that every chronological (date-wise)
details of different types of costs (e.g.: rent, electricity bill, wages, transportation cost, raw material costs
and many more), every details of credit sales from different persons, daily cash sales details, the amount
of cash received and paid, detail lists of assets, bank balances etc is recorded. Accounting Department of
a business organization does these jobs.

Let us now know some of the important words and their meanings used in accounting.

Assets: the resources used to set-up and operate a business is known as assets. Assets can be sold to
make them cash though cash itself is an asset for business. Assets can be of two types:

Non- current assets: The assets that are used in the business for more than a year and bought not for re-
sell purpose is called non-current assets. Examples of non-current assets are building, machinery,
computer, furniture, electrical and electronic goods used in the office or in the factory like light, fan, AC.

Current Assets: Assets that are used within a year and which keep on changing into different form is
called current assets. Some examples of current assets are cash in till, bank balance of the business,
account receivables, inventories, and inventories of office stationeries, cash and cash equivalents,
marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.
Current assets are balance sheet accounts that represent the value of all assets that can reasonably expect
to be converted into cash within one year. Current assets include.

Account Receivables: Account receivables are those people or organizations from which business will get
money because business sold goods to them on credit and they are supposed to pay the money at a later
date rather than paying them immediately. A business may make credit sale to number of buyers and it is
a common thing in modern business world.

Account Payable: It means other business or person will get money from us as we bought from them in
credit and promised them to pay in a future date.

Inventories : inventory may be the finished goods in the warehouse waiting for sale or the raw materials
to be used to produce another good like fabrics used to make dresses or spare parts of machines required
to repair a break-down machine or anything that is neither raw materials nor finished goods that is called
semi-finished goods. Inventory is the raw materials, work-in-process products and finished goods that are
considered to be the portion of a business's assets that are ready or will be ready for sale.

Liabilities: When anybody or any other businesses get money from our business then those business or
persons are known as liabilities of the business. Liabilities may be created if we buy raw materials from
other business on credit or if we take loans from bank or if workers are yet to pay their salaries and for
many similar reasons. Account Payables, accrued salaries, utility bills are examples of business liabilities.

The liabilities that are needed to be paid within a year are known as short – term liabilities. For example,
account payables and accrues.

The liabilities that can be paid over a long period of time usually more than a year is called long term
liabilities for example loan from banks.

Capital: Capital is the initial amount of money the owner brings into the business to start the business
with. With the capital, owner buys non-current assets and current assets required for the business. Capital
refers to financial assets or the financial value of assets, such as funds held in deposit accounts, as well as
the tangible machinery and production equipment used in environments such as factories and other
manufacturing facilities.

Book Keeping: Book keeping means, keeping systematic records of daily financial transaction of a
business so that useful information regarding different accounts can be found in a chronological order.

Accounts: Account means to record same types of transaction altogether in a particular heading
chronologically. For example, in a Cash Account all the cash transactions are recorded, in a Furniture
Account, all the furniture bought for business use, is recorded or in a Loan Account, all the loans from
different sources is recorded.

Capital Expenditure: Money spent for buying non-current assets of a business. For example, money spent
for decorating an office, buying machinery, furniture, the making cost of a building etc.

Revenue Expenditure: Money spent for generating revenue like manufacturing cost of a good or when a
retailer buys different types of goods for selling purpose or daily and monthly expenses like rent, salary of
workers, electricity bill, to run a business.

QUESTIONS:

1. What is book keeping? Why is book keeping important for a business?

a) Capital and revenue expenditure

b) Short-term and long term liabilities

c) Account receivable and account payable.

3. Define inventory. Identify three types of inventories a business may have.