Basic Accounting Terms
1) Proprietor/Owner
A proprietor is a person who invests cash and other assets into the business. They bear the risk of the business, manage its operations, and are responsible for all business activities.
2) Capital
Capital is the amount invested by the proprietor in the business, which may be in the form of cash or assets. It is used for purchasing fixed assets (such as land, plant & machinery, and furniture) and goods. Capital is also known as net worth or owner's equity.
Types of Capital:
Opening Capital: The initial amount invested by the owner at the start of the business or an accounting period.
Additional Capital: Extra cash or assets invested by the owner during the accounting year.
Closing Capital: The capital at the end of the accounting period.
Knowledge Point!
Closing Capital = Opening Capital + Additional Capital + Profit – Drawings
3) Drawings
Any cash, goods, or assets withdrawn by the proprietor from the business for personal use or domestic consumption is called drawings.
Knowledge Point!
Drawings include:
- Goods and cash withdrawn for personal use.
- Life insurance premiums paid by the business.
- Income tax paid by the business.
4) Liabilities
Liabilities are obligations/burden that a business must pay in the future. They represent claims of outsiders against the business.
Types of Liabilities:
1. Internal Liabilities:
The capital invested by the proprietor is considered an internal liability.
2. External Liabilities:
These are legal or financial obligations that a business must pay to outsiders, such as creditors, bank loans, and outstanding rent.
Kinds of External Liabilities:
Non-Current Liabilities: Payable over a long period (more than one year).
Examples: Long-term loans, debentures, and bonds.
Current Liabilities: Payable within a short period (within an accounting year).
Examples: Creditors, short-term loans, and other outstanding expenses.
Knowledge Point!
An accounting period is a specific time frame for which a company maintains and reports its financial records.
5) Assets
Assets are resources owned and controlled by the business that have monetary value.
Types of Assets:
1.Non-Current Assets (Fixed Assets):
Held for a long-term basis and used in the normal operations of the business.
Examples: Land, buildings, machinery, office furniture.
2. Current Assets:
Used or consumed within one accounting period to generate revenue.
Examples: Goods, raw materials, cash in hand.
Further Classification of Assets:
Tangible Assets: Have a physical existence and can be seen or touched.
Examples: Land, office furniture, machinery, laptops.
Intangible Assets: Do not have a physical existence and cannot be touched.
Examples: Trademarks, patents, goodwill, computer software.
Note:-These assets are usually not bought or sold in the open market.
6) Expenses
Expenses refer to the money spent by a business to earn revenue. They represent the cost of goods and services used to generate income and reduce business profits.
Examples of Expenses:
- Salaries
- Rent
- Electricity bills
- Wages
- Miscellaneous expenses
Note:the benefits of expenses expire within an accounting period.
7) Revenue
Revenue refers to the total income earned by a business from its operations, such as the sale of goods or services and the sale of scrap, before deducting expenses and taxes.
8) Income
Income is the profit earned by a business during an accounting period. It is the difference between revenue and expenses.
Example: if a goods costing ₹90,000 and is sold for ₹1,00,000, then:
Income = Revenue – Expenses
₹10,000 = ₹1,00,000 – ₹90,000
