BRIDGE COURSE

FINANCIAL ACCOUNTING
DR SHILPA RAJAGOPAL
SCHOOL OF BUSINESS & MANAGEMENT
 THE ACCOUNTING
• Accounting is an ancient art, certainly as old money itself which conveys the language of business by
recording, classifying and summarizing money transactions & events in a significant manner and
interpreting the results thereof.
• In modern age the scope of business has been widen. The production and the sales are made at large
scale due to division of labor, specialization and scientific management.
• The customers of a seller are spread over throughout the country. Usually the seller sells their goods
for cash but to increase their sales the number of credit transactions increases.
• The memory of human being is limited. Therefore, it is not possible to remember all the transactions
of a business. To overcome this problem, the work of recording the business transactions started
which develops.
• Different methods of bookkeeping were used in different periods. Today we can say that the
bookkeeping is a foundation on which the whole structure of modern business is based.
 ACCOUNTING
• The field of accounting is generally sub-divided into:
(a) Book-keeping
(b) Financial Accounting
(c) Cost Accounting
(d) Management Accounting
 BOOK-KEEPING
• The most common definition of book-keeping as given by J. R. Batliboi is “Book-keeping is an art of recording
business transactions in a set of books.”

• As can be seen, it is basically a record keeping function. One must understand that not all dealings are,
however, recorded. Only transactions expressed in terms of money will find place in books of accounts. These
are the transactions which will ultimately result in transfer of economic value from one person to the other.

• Book-keeping is a continuous activity, the records being maintained as transactions are entered into. This being
a routine and repetitive work, in today’s world, it is taken over by the computer systems. Many accounting
packages are available to suit different business organizations.

• It is also referred to as a set of primary records. These records form the basis for accounting. It is an art
because, the record is to be kept in such a manner that it will facilitate further processing and reporting of
financial information which will be useful to all stakeholders of the business.
 NEED FOR ACCOUNTING
• Accounting has rightly been termed as the language of business. It communicates the business
operations to various parties who have some stake in the business viz., the proprietor, creditors,
investors, Government and other agencies.
• The need for accounting is mainly for a person who is running a business.
• He should know:
(i) what he owns?
(ii) What he owes?
(iii) Whether he has earned a profit or suffered a loss on account of running a business?
(iv) What is his financial position?
i.e. whether he will be in a position to meet all his commitments in the near future or he is in the process
of becoming a bankrupt.
 MEANING, OBJECTIVES & SCOPE OF ACCOUNTING
• “Accounting is the process of identifying, measuring and communicating economic information to
permit informed judgments and decisions by the users of information”
• In the beginning the main objective of accounting was to ascertain the result of the business (whether
profit has been earned or loss has been suffered) during a year and to show the financial position of the
business as on a particular date.
• But which the lapse of time more and more being expected from accounting. At present accounting has
to meet the requirements of taxation authorities, investors, government regulations, management and
owners. This has resulted in widening to scope of accounting and may be defined as follows:
• With greater economic development resulting in changing role of accounting, its scope became broader.
In 1966 the American Accounting Association (AAA) defined accounting as “the process of identifying,
measuring and communicating economic information to permit informed judgments and decisions by
users of information.”
• In 1970 the, Accounting Principles Board of AICPA also emphasized that the function of accounting is
MEANING, OBJECTIVES & SCOPE OF ACCOUNTING
• Accounting can therefore be defined as the process of identifying, measuring,
recording and communicating the required information relating to the economic
events of an organization to the interested users of such information. In order to
appreciate the exact nature of accounting, we must understand the following
relevant aspect of the definition:
∙ Economic events
∙ Identification, Measurement, Recording and communication
∙ Organization
∙ Interested users of information.
 DEFINITION OF ACCOUNTING
• In 1941, the American Institute of Certified Public Accountant (AICPA) defined accounting as
follows:
• “Accounting is the art of recording, classifying and summarizing in significant manner and in
terms of money, transactions and events which are, in part, at least of a financial character and
interpreting the results thereof.”
• Thus accounting cycle involves the following stages:
1. Recording of Transactions. This is done in the book termed as ‘Journal’.
2. Classifying the Transactions. This is done in the book termed as ‘Ledger’.
3. Summarizing the Transactions. This includes preparation of the trial balance, profit and loss
account and balance sheet of the business.
4. Interpreting the Result. This involves computation of various accounting ratios, etc., to
BOOK KEEPING V/S ACCOUNTING
 FUNCTIONS OF ACCOUNTING
Recording
• This is the basic function of accounting. Recording is done in the book “Journal”.
• This book may be further subdivided into various subsidiary books such as Cash Journal (for recording
cash transactions), Purchase Journal (for recording credit purchase of goods), Sales Journal (for recording
credit sales of goods), etc. the number of subsidiary books to be maintained will be according to the
nature and size of the business.
Classifying
• Classification is concerned with the systematic analysis of the recorded data, with a view to group
transactions or entries of one nature at one place.
• The work of classification is done in the book termed as “Ledger”.
Summarising
• This involves presenting the classified data in a manner which is understandable and useful to the
internal as well as external end-users of accounting statements.
 FUNCTIONS OF ACCOUNTING
Dealing with Financial Transactions
• Accounting records only those transactions and even in terms of money which are of a financial character.
• Transactions which are of a financial character are not recorded in the books of accounts.
Analysing and Interpreting
• The recorded financial data is analysed and interpreted in a manner that the end-users can make a meaningful
judgement about the financial condition and profitability of the business operations.
• The term ‘Analysis’ refers to the methodical classification of the data given in the financial statements.
• The term ‘Interpretation’ means, explaining the meaning and significance of the data simplified.
 FUNCTIONS OF ACCOUNTING

Communicating
• The accounting information after being meaningfully analysed and interpreted
done through preparation and distribution of accounting reports, which includes
besides the usual income statement and the balance sheet, additional information
in the form of accounting ratios, graphs, diagrams, funds flow statements, etc. the
initiative, imagination and innovative ability of the accountant are put to test in
this process.
 OBJECTIVES OF ACCOUNTING
❑ To keep systematic record of business transactions

❑ To calculate profit or loss of the business

❑ To depict the financial position of the business

❑ To provide information’s to various parties

❑ Other objectives: Accounting functions also fulfill the following objectives:

❖ To keep systematic and permanent record of all financial transactions

❖ To use accounting records for future reference

❖ To fulfill the legal requirements

❖ To provide information about various tax liabilities

❖ To check the accounting errors, frauds, and misappropriations of funds

❖ To know the requirements of the business

❖ To help in fulfilling tenders and quotations

❖ To provide information about profitability of various products

 LIMITATIONS OF ACCOUNTING
❖ Incomplete information
❖ Influenced the by personal judgments
❖ Realizable value of business is not shown
❖ Complete control on frauds is impossible
❖ Manipulation in accounts
❖ Does not provide timely information
 ACCOUNTING SYSTEM
• Business transactions may be recorded in any system, which will enable the ascertainment of the profit or
loss of a business and its financial position. The following are the main systems adopted by business
people:
• Cash System of Accounting: Under this system, only actual cash receipts and payment transactions will
be entered into the books of accounts. No entry will be made for credit transactions
• Government system of accounting is mostly on cash basis. Certain professional organisations also record
their income on cash basis, but while recording expenses they take into account the outstanding expenses
also and prepare Income and Expenditure Account instead of Profit and Loss Account.
• Merchantile System of Accounting: This system is based on Double Entry Principle. This Book Profit
System of Accounting” takes into consideration all the aspects of business transactions (Both Credit and
Cash transactions).
• This system is followed by most of the industrial and commercial firm. This system owes its origin to an
Italian Merchant Luco Pacioli who wrote the book entitled “De Computis et Scripturis” on Double Entry
 ACCOUNTING SYSTEM
• SYSTEM OF BOOK KEEPING
• The art and technique of recording the business transactions in a set of books is called as Bookkeeping. It is the
process of analyzing, classifying and recording transactions in accordance with a preconceived plan.
• This recording may be done according to two ways:
1) Single Entry System: which is an incomplete maintenance of books of accounts without following the Double
Entry Concepts and Conventions, where some business houses maintains for their convenience keeping only some
of the essential Books of Records. Thus it is referred as incomplete double entry recording of business
transactions.
2) Double Entry System: Where the transactions are recorded according to the Golden Rules of Accounting taking
into consideration both the aspects of a transaction (Debit and Credit) and following the Accounting Concepts and
Conventions. This system maintains both Book of Original Entry (Journal / Subsidiary Books) and Book of Final
Entry (Ledger) according to the classification of Accounts into Real, Personal & Nominal, in order to know the
state of affairs of the business by preparing the Profit and Loss Account and Balance Sheet from the Trial
Balance.
 BRANCHES/STREAMS OF ACCOUNTING
• The subject of accountancy has become important for all the business organization in the present time. Its subject
matter has been increased and it has taken the form of accounting. Accounting subject has the following branches:
FINANCIAL ACCOUNTING
1. Journal
2. Ledger
3. Trial Balance
4. Final Accounts
COST ACCOUNTING
1. Cost sheet
2. Job and contract costing
3. Process costing
4. Operating costing
 BRANCHES/STREAMS OF ACCOUNTING

MANAGEMENT ACCOUNTING
1. Ratio Analysis
2. Break event Point Analysis
3. Standard costing
4. Analysis Of Financial Statements

TAX ACCOUNTING
1. Sales Tax
2. Income Tax
3. Wealth Tax
4. Excise Duty
 BRANCHES/STREAMS OF ACCOUNTING
GOVERNMENT ACCOUNTING
1. Budget
2. Consolidated Fund
3. Contingency Fund
4. Public Accounting
SOCIAL RESPONSIBILITY ACCOUNTING
1. Social Fund
2. TQM
3. Environmental Accounting
HUMAN RESOURCES ACCOUNTING
1. Employee Inventory Management
2. HRD Operational & Administrative Aspects
3. Profitability and Work Measurement
 FINANCIAL ACCOUNTING
❖ “Financial Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events which are at least
in part, of a financial character, and interpreting the results thereof.”
❖ In financial accounting we record the business transactions in the books of accounts.
❖ Its object is to ascertain the profit or loss and to know the financial position of the
business.
❖ In this, Journal, Subsidiary books, Ledger, Trial balance, trading account, Profit &
loss account and Balance sheet are prepared.
 CLASSIFICATIONS OF ACCOUNT

• Classification of Accounts According to Traditional Approach

1. Personal Accounts
• Accounts related to individuals, banks, financial institutions, firm, companies, cooperative societies are known as
personal accounts. The personal accounts are related to natural persons, artificial persons and representative
persons. It may be classified into the following three categories:
❑ (a) Natural Personal Accounts : It represents human beings. Accounts of individuals (natural persons) such as Ram’s
A/c, Sunil's A/c are natural personal accounts.
❑ (b) Artificial Personal Accounts: This type of account represents legal entities that are not considered human beings by
law. Accounts of firms, companies, banks, cooperative societies financial institutions are artificial personal accounts
such as Ram and Co's A/c, Reliance Industries Ltd., Friends Club, etc.
❑ (c) Representative Personal Accounts: This account represents accounts of both natural and artificial entities. The
transactions in this account either belong to the previous year or the coming year. The accounts related to outstanding
expenses, prepaid expenses, income received in advance (unearned income), accrued income are representative
personal accounts. For example Rent outstanding, Insurance prepaid,Commission received in advance, etc
 RULES OF DEBIT AND CREDIT

1. Personal Account
• Includes the accounts of persons with whom the business deals.
• Examples: - Debtors, Creditors, proprietor etc.
Rule:
Debit the receiver
Credit the giver
 RULES OF DEBIT AND CREDIT
2. Real Account
• Includes the accounts which relate to such things which can be touched,
felt, measured etc. examples of such accounts are cash account, buildings
account, furniture account, stock account etc.
• Rule:

Debit what Comes In

Credit what Goes Out
 RULES OF DEBIT AND CREDIT

3. Nominal Account
• These accounts are opened in the books to simply explain the
nature of the transactions. They do not really exist. For example,
salary, wages, purchases, discount, printing and machinery, rent,
commission etc.
• Rule: Debit All Expenses and Losses
Credit All Gains and Incomes
 CLASSIFICATIONS OF ACCOUNT
• Classification of Accounts According to Accounting Equation
1. Assets Accounts
It relates to tangible or intangible assets.
For examples, plant account, machinery account, goodwill account, etc.

2. Liabilities Accounts
These accounts represent the financial obligations of the enterprise towards outsiders.
For example, trade creditors, bills payable, long-term loans, bank overdraft, etc.

3. Capital Accounts
These accounts relates to owners of an enterprise.
For example: Capital A/c, Drawings A/c. Capital is the amount due by the enterprise to the
 CLASSIFICATIONS OF ACCOUNT

4. Revenue Accounts

These accounts relate to amount earned by the enterprise by rendering goods and services.
For example: sales account, discount received account, interest earned account, etc.

5. Expense Accounts

These accounts relate to the amount lost or incurred in the process of earning revenue.
For Purchases account, Discount allowed account, Loss by theft account, etc.
 BASIC ACCOUNTING TERMS

❖ Account:
❖ It is a record of both cash and credit transactions maintained under a particular
head which shows the transactions and the effect of such transactions in the
books of accounts.
❖ Business Transaction:
• Transaction: It is an event which involves transfer of money, goods and services
and can be classified into cash or credit transactions.
• Cash transaction is the one where cash receipt or payment is involved and a
credit transaction is one where cash is not involved immediately but will be paid
or received later.
 BASIC ACCOUNTING TERMS

Business
Transactions

Based on
Based on Mode
Relationship with
of Settlement
Accounting Unit

Internal External Cash Credit

Transactions Transactions Transactions Transactions
 BASIC ACCOUNTING TERMS

❖ Capital:
• It is the amount invested by the proprietor (in case of proprietorship business) and by
partners (in case of partnership business) into the business.
• If the business earns profit or proprietor/partners invests additional amount, the
amount of capital increases in the business.
• On the other hand, if the business incurs losses or amount is withdrawn, the amount of
capital decreases.
• Capital is also known as Owner’s Equity or Net Worth which is computed as excess of
Assets over Liabilities as follows:
Capital = Assets - Liabilities
 BASIC ACCOUNTING TERMS

❖ Drawings:
• It is the amount of cash or goods withdrawn from the business by the proprietor (in
case of proprietorship business) or by partners (in case of partnership business) for
their personal use.
• Such an amount reduces the amount of investments or capital of the owners in the
business and therefore, is shown as a deduction from the capital of the proprietor or
partner while preparing the Balance Sheet.
 BASIC ACCOUNTING TERMS

❖ Liabilities:
• It refers to the financial obligations or debt which a business owes to others, i.e. amount business is
liable to pay others such as loans from banks, other persons or creditors for goods supplied.
• These liabilities are classified as Internal or External Liabilities where, internal liability is the liability
towards owners of the business and external liability is the liability towards the outsiders (i.e., other
than owners).

Classification
of
Liabilities

Non-Current Current
Liabilities Liabilities
 BASIC ACCOUNTING TERMS

Non-Current or Long term Liabilities:

• These are the loans which are payable after a period of more than a year from
the end of the accounting period. Examples include, long-term loans,
debentures, etc.
Current or Short term Liabilities:
• These are the obligations which are payable within a period of 12 months from
the end of the accounting period. Examples include, bills payable, short-term
loans, etc
 BASIC ACCOUNTING TERMS

❖ Assets:
• These are the properties owned by the business which are used to carry out the
business operations and earn operating revenue for the business.

Classification
of
Assets

Non-Current Fictitious
Current Assets
Assets Assets
 BASIC ACCOUNTING TERMS

Non-Current assets:
• These are used for carrying out normal business operations and are held in the
business not for the purpose of reselling it but to increase the earning capacity of the
business. These are further classified as Fixed Assets, Non-Current Investments, Long
term Loans and Advances and Other Non-Current Assets.
❑ Fixed Assets: These are those assets which are not held in the business for reselling
but are held for a long term to increase the earning capacity of the business. They are
further classified as follows:
▪ Tangible: Assets which have physical existence and can be seen and touched are
termed as Tangible Assets. It includes land, building, furniture, etc.
▪ Intangible: Assets which do not have physical existence and cannot be seen and
touched are termed as Intangible Assets. It includes patents, goodwill, etc.
 BASIC ACCOUNTING TERMS

Current Asset:
• These are those assets which are held on short term basis for the purpose of converting
them into cash within a year such as debtors, stocks, etc.
• Prepaid expenses are also classified as current assets because although they cannot be
converted into cash, because a part of their benefit is available for next accounting
year.
Fictitious Assets:
• These are those assets which are neither tangible nor intangible. These are the losses
not written off in the year in which they are incurred but in more than one accounting
period.
 BASIC ACCOUNTING TERMS

❖ Receipts:
• It is the amount which is received or receivable for selling goods, services or assets.
These receipts are further classified as follows:
Revenue Receipts: The amount that has been received or is receivable by the business in its
normal course either from sale of goods or by providing services.
• It will also include the amounts that are received from investment of business resources say
interest received from investment in fixed deposits. Such amounts from normal course of
business are recorded in the Profit and Loss Account (in case of profit-making enterprises) and in
the Income and Expenditure Account (in case of an NPO).
Capital Receipts: The amount received or receivable against the transactions which are not
revenue in nature like sale of an asset, investment, etc. Such amounts are shown in the Balance
Sheet of the business entity
 BASIC ACCOUNTING TERMS

❖ Expenditure:
• It is the amount spent or liability incurred for acquiring assets, goods or services.
Revenue Expenditure: It is that expenditure the benefit of which is consumed or exhausted within the
accounting period. These are the amounts spent for the purposes which are directly Classification of Assets
Non-Current Assets Current Assets Fictitious Assets related to the business of the entity like cost of goods
sold, rent, electricity, etc. They are shown in the Trading or Profit and Loss Account (in case of profit-making
enterprises) and in the Income and Expenditure Account (in case of an NPO).
Capital Expenditure: It is the amount incurred to acquire tangible or intangible assets or the amount spent on
improving the existing assets which increase the earning capacity of the business. These amounts spent are
shown in the Balance Sheet of the entity.
Deferred Revenue Expenditure: This is a revenue expenditure in nature which is written off or charged in
more than one accounting period. Such treatment is given to those items, the benefits of which are estimated
to accrue in more than one financial year. These include the large expenditure amounts like advertising
expenses, research expenses, etc. that will give benefit for more than one accounting period
 BASIC ACCOUNTING TERMS

❖ Income:
• It is the profit earned during an accounting period which is calculated as the difference
between the Revenue and Expenses. In other words, excess of Revenue over expenses is termed
as Income.
❖ Gain:
• It is the increase in the owners’ equity resulting from something other than the day to day
earning that is of irregular or non-recurring nature. It is the profit from non-operating transactions
but which is incidental to it such as gain on sale of land, machinery or investments.
❖ Loss:
• Loss refers to the excess of expenses over its related revenues for a period which
decreases the owners’ equity. It is a broad term and includes loss incurred in its operating
activities, money or money’s worth lost against which the firm receives no benefit, or any loss from
events of non-recurring nature.
 BASIC ACCOUNTING TERMS
❖ Expense:
• It is the cost incurred for generating revenue or a monetary measure of inputs or resources consumed.
It is actually the value of business that has expired during the accounting year.
• It includes amount spent as cash payments for salaries, wages or amounts that are written off during
an accounting period like depreciation, bad debts or decline in the value of any investment or cost of
goods sold. It is charged to the Trading Account or Profit and Loss Account.
Prepaid Expenses: It is the amount of expense which is paid in advance and the benefit of which
will be available in the following year or years and therefore, are shown as assets in the Balance
Sheet of the business.
Outstanding Expenses: It is an expense that has been incurred but has not been paid during the
current accounting year. Since, the amount is payable, it is a liability for the business and is
therefore, shown as a liability in the Balance Sheet
 BASIC ACCOUNTING TERMS

❖ Profit:
• It is the income earned by the business from its Operating Activities which are
carried out by the enterprise to earn profits.
• These activities can be either sale of goods or provision of services.
Gross Profit: It is the difference between revenue from sales and/or services
rendered and its direct cost.
Net Profit: It is the profit after deducting total expenses from total revenue of
the enterprise. In case if the total expenses are more than the total revenue,
such difference is termed as Net Loss
 BASIC ACCOUNTING TERMS

❖ Purchases:
• It refers to the amount of goods which are bought for resale or the amount of raw materials that are
used in the production process. It includes both cash and credit purchases of goods.
❖ Purchases Return:
• When goods are returned to the suppliers for any reason, it is called as purchases return or returns
outward.
❖ Sales:
• Sales refers to the amount of goods sold that have already been bought or manufactured by the
business. It includes both cash and credit sales of goods.
❖ Sales Return:
• When goods are returned from the customers for any reason, it is called sales return or return inward.
 BASIC ACCOUNTING TERMS

❖ Revenue from Operations:

• Revenue means the income generated from the sale of goods (in case of a non-financial enterprise) and the
earnings from interest, dividend and commission (in case of a financial enterprise). In other words, it is
revenue earned by an enterprise from its operating activities.
❖ Goods:
• These are the physical items of trade that are purchased to be sold and includes all the items making up the
sales or purchases of a business. In other words, it is actually Stock-in-trade of an enterprise, purchased or
manufactured with the purpose of selling.
❖ Stock/Inventory:
• Stock or Inventory is a tangible asset that is held by the business for the purpose of sale in normal course of
business or for the purpose of using it in production of goods meant for sale.
• It includes goods unsold on a particular date. It may be opening or closing stock.
• The goods unsold in the beginning of the accounting period is called opening stock, whereas the goods unsold
at the end of the accounting period is called closing stock.
 BASIC ACCOUNTING TERMS

❖ Trade Receivables:
• It is the amount that is receivable for sale of goods and/or services rendered
in the ordinary course of business. It is a sum total of debtors and bills receivable.
Debtor: A debtor is one who owes some amount to the business. For example, a customer who
purchases goods on credit from the business, is a debtor to the business. Includes a person who
receives a benefit without paying money immediately but liable to pay in future within a
particular period of time. He owes an amount to business against credit sale of goods/services
rendered.
Bills Receivable: It is the amount of Bill of Exchange accepted by a debtor specifying the amount
of which will be received on the specified date from him by the business.
 BASIC ACCOUNTING TERMS

• Cost:

• It is the amount incurred on or attributable to a specified item or activity in the business.

• Trade Payables:

• It is the amount payable for purchase of goods and/or services taken in the
ordinary course of business. In other words, it is the sum total of creditors and bills payable.
Creditor: A creditor is a person who gives a benefit without receiving money
immediately but to claim it in future. It is to whom our business owes an amount against
credit purchases of goods/services.
Bills Payable: It is the amount of Bill of Exchange accepted by the person or enterprise, the
amount of which will be payable on the specified date.
 BASIC ACCOUNTING TERMS
❖ Vouchers:

• A voucher is a written document in support of a particular transaction. It includes, cash memo as given by the seller for cash
purchase, invoice given for credit purchase and received receipt for making cash payment.

❖ Discount:

• It is the amount of reduction in the price of goods and/or services or a reduction in the total amount payable for such goods
or services. Such discount is further classified as Trade Discount and Cash Discount

Trade Discount: It is a reduction in the prices of the goods allowed by the seller to the buyer for buying goods of certain
quantity or value. When such discount is allowed, Purchases and Sales are recorded in the books at their net value i.e.,
Purchases – Trade Discount and Sales – Trade Discount respectively.

Cash Discount: It is allowed for timely payment of the amount. Such amount is recorded in the books for which it is treated
as an expense by the party allowing such discount and income by the party receiving such discount
 BASIC ACCOUNTING TERMS

❖ Bad Debts:
• It is the amount receivable by the business which becomes irrecoverable and is therefore, treated as a loss by the
business and debited to the Profit and Loss Account.
❖ Balance Sheet:
• It is a statement of financial position of a business on a particular date, which shows the assets, liabilities, capital
reserves and other account balances at their respective book values.
❖ Book Value:
• It is the value at which the items (assets, liabilities, etc.) appear in the books of accounts or financial statements.
❖ Books of Account:
• It is the records or books in which all the financial transactions of an entity are recorded and maintained. It
includes journal, ledger, cash book and bank book
 BASIC ACCOUNTING TERMS

❖ Books of Account:
• It is the records or books in which all the financial transactions of an entity are recorded and maintained. It
includes journal, ledger, cash book and bank book.
❖ Cost of Goods Sold:
• It is the cost attributable to the production of goods sold and/or services rendered.
❖ Debit:
• It is the left side of an account and is derived from an Italian word ‘Debito’. In case where an account is to be
debited, the entry is posted to the debit side of an account and it is said that the account is debited.
❖ Credit:
• It is the right side of an account and is derived from an Italian word ‘Credito’. In case where an account is to be
credited, the entry is posted to the credit side of an account and it is said that the account is credited.
 BASIC ACCOUNTING TERMS
❖ Depreciation:
• It is a fall in the value of an asset on account of usage or passage of time or obsolescence. It is
allocation of cost of the fixed asset in each accounting year during its expected useful life
❖ Entity:
• It is an economic unit which carries out various economic activities and is established in accordance
with the law in force. It includes proprietorship, partnership firms, corporations, companies, etc.
❖ Entry:
• It is a transaction or an event which is recorded in the books of account.
❖ Insolvent:
• It is the state of a person/entity where he is unable to pay its debts.
 BASIC ACCOUNTING TERMS

❖ Proprietor:
• A person who owns a business and contributes capital to the business to earn profit is called
proprietor.
❖ Rebate:
• It is a reduction in the price of the goods after the goods have been sold and is offered for
reasons other than that which may have been for allowing trade discounts (say, bad quality products
delivered).
• It is offered and allowed on sales completed in the past.
❖ Solvent:
• It is the state where a person/entity is in position to pay of its debts.