BASIC TERMINOLIGIES USED IN FINANCIAL ACCOUNTING BY: WAQAR AHMAD LECTURER MANAGEMENT SCIENCE DEPARTMENT RANA UNIVERSITY KABUL, AFGHANISTAN

Assets: All those things which are valuable; possessed & owned by a business & a business has a right to sale it any time are called as Assets. For example, land, building, machinery, equipment, furniture, notes receivables or bills receivables, long term investments, inventory, cash, marketable securities, accounts receivables etc. Fixed assets cannot be quickly turned into cash without interfering with business operations. Fixed assets include land, buildings, machinery, equipment, furniture, and long- term investments. Current Assets: Those assets, which can be turn into cash within a year or less. For example, cash, marketable securities, accounts receivable, notes receivables or bills receivables & inventory.

Tangible Assets: Those assets which physically exist & can be seen or touched are called as Tangible Assets. For example, plant & machinery, furniture, building, cash, etc. Intangible Assets: Intangible assets are those assets which do not physically exist, also cannot be seen or touched but their possession gives rights & benefits to its owner are called as Intangible Assets. For example patents, copyrights, trademarks, licenses, franchises, and other kinds of rights or things of value to a company. Often they are not shown on financial reports.

Equity: The right possessed by the owner or outsiders, against the assets of the business is called as equity. Equity can be divided into two categories. Owner’s Equity: The capital invested by the owner in the business is called as owner equity. It is a claim of owner on the assets of business. It is also called as capital fund or internal equity.

Liabilities: It is claim of the outsiders against the business. It is also called as external equity. It has two types. Short Term or Current Liabilities: The liabilities which are payable in near future (within one year) are called as short term or current liabilities. For example, accounts payable, notes payables or bills payable, expenses payable, bank overdraft, etc. Long Term Liabilities: The loans which are raised for the permanent finance of the business & are payable after number of years. For example, long term loans from bank.

Expense: An amount used in order to generate revenue or to sell or produce goods & services is called as expense. For example, rent paid, electricity bill paid, etc. Expenditure: When something is purchased for business, it will be called as expenditure. For example, a truck purchased for business, it is called as expenditure. When the truck will be start depreciating, it will be called as expense. Revenue: Revenue means the amount received by any business from selling main goods or services to its customers during any period. For example, a shopkeeper’s real business is selling stationary. So the amount he will earn or receive from his customers by selling stationary will be called as his revenue.

Income: Generally, we can say that there is no big difference between revenue & income. But this term income actually means the total earnings of the business from its all activities. Let’s take the example of the same shopkeeper. The real business of this shopkeeper is to sell stationary. But let suppose, he is also selling cold drinks in addition to his real business, so the earnings he received from selling both stationary & cold drinks will be called as his income.

Profit: An amount which is left after deducting cost of sales & expenses from revenue is called as profit. For example, the shop keeper purchases stationary for $ He sells this stationary on $ The expenses incurred on selling this stationary are $ 1000, i.e., electricity bill; wages to workers, etc. Now, Revenue is $ 8000, Cost of Sales or Cost of Goods Sold is $ 4000, & Expenses are $ So, Revenue – (Cost of Sales + Expenses) = Profit 8000 – ( ) = 3000

Gross Profit: When cost of sales & expenses related only to the main activity of business is deducted from revenue, it is called as gross profit. Gross means the amount without deduction of whole business expenses. For example, the shopkeeper sells stationary, which is the main activity of business. So when the shopkeeper will deduct the cost of that stationary & expenses related only to sale of this stationary, it remaining amount will be called as gross profit. The example of expenses related to main activity of business in this case can be the wages paid to a salesman on counter to sell stationary.

Net Profit: When cost of sales & expenses related to the main activity of business, as well as the expenses related to all other activities of business is deducted from revenue, it is called as net profit. Net means the amount after deduction of whole business expenses. For example, the shopkeeper sells stationary, which is the main activity of business. He is also selling cold drinks. So when the shopkeeper will deduct the cost of that stationary & expenses related to sale of this stationary, plus all those expenses which are related to other activities of business, the remaining amount will be called as net profit. The example of expenses related to whole activities of business in this case can be the electricity bill paid for this month. It is important to know that net income includes other incomes.

Other income: Income earned from sources other than business is called as other income. For example, divided received, interest received, etc. Dividend: An amount paid to shareholders according to the percentage of their shares, from net earnings or net income, is called as dividend. For example, Ali has 200 shares of XYZ Limited Company. The price of one share is $ 100. So Ali has a share of $ in XYZ Limited Company. Now the company announces to pay 10% profit as a dividend to its shareholders. So, 10% of $20000 is $2000. This amount will be called as dividend.

Interest: The amount paid as a fee for borrowing money is called as interest. For example, Mr. A lends $ to Mr. B on interest rate of 10% per month. Now after every month, Mr. B will pay 10% of $10000, which is $ This will be called as interest paid by Mr. B & interest received by Mr. A. Retained Earnings: The amount of percentage of net earnings; not paid out as dividend, but retained by the company to be reinvested in its business or to pay debt is called as retained earnings. It is recorded under shareholder’s equity on the balance sheet.

Accrued Expenses: The expense which has been incurred but not yet paid is called as accrued expense. It is also called as expenses payable. For example, ABC limited company whitewashed its office by Mr. Z & Co, who is providing whitewashing facility, but the payment has not yet been made to Mr. Z & Co. The expense occurred will be shown in income statement under expenses, & expenses payable will be shown in balance sheet under current liabilities.

Accrued Income: An income which has been earned but not yet received is called as accrued income. It is also called as income receivable. For example, prize money on prize bond, interest on bank deposit, etc. Accrued income will be shown income in income statement, & will be shown as income receivable in balance sheet under current assets. Outstanding Expenses: Expenses which are payable are called as outstanding expenses. For example, electricity bill, canteen bill, etc.

Overdue Expenses: Expenses which date of payment is passed & we do not pay these expenses are called as overdue expenses. For example, the last date of submission of electricity bill is 5 th May, but you see the bill on 7 th May. Prepaid Expenses: Expenses paid in advance are called as prepaid expenses. For example, purchasing of prepaid mobile card, a lawyer fee paid in advance, etc.

Transactions Transactions are those activities of a business, which involve transfer of money or goods or services between two persons or two accounts. For example, purchase of goods, sale of goods, borrowing from bank, lending of money, salaries paid, rent paid, commission received and dividend received. Transactions are of two types, namely, cash and credit transactions.

Cash Transaction is one where cash receipt or payment is involved in the transaction. For example, When Rahim buys goods from Karim paying the price of goods by cash immediately, it is a cash transaction. Credit Transaction is one where cash is not involved immediately but will be paid or received later. In the above example, if Rahim, does not pay cash immediately but promises to pay later, it is credit transaction.

Purchases Purchases refers to the amount of goods bought by a business for resale or for use in the production. Goods purchased for cash are called cash purchases. If it is purchased on credit, it is called as credit purchases. Total purchases include both cash and credit purchases. Purchases Return or Returns Outward When goods are returned to the suppliers due to defective quality, it is called as purchases return. To find net purchases, purchases return is deducted from the total purchases.

Sales Sales refers to the amount of goods sold that are already bought or manufactured by the business. When goods are sold for cash, they are cash sales but if goods are sold and payment is not received at the time of sale, it is credit sales. Total sales includes both cash and credit sales. Sales Return or Returns Inward When goods are returned from the customers due to defective quality, it is called as sales return or returns inward. To find out net sales, sales return is deducted from total sales.

Proprietor A person who owns a business is called its proprietor. Proprietor simply means owner of the business. He invest capital in the business with the intention of earning profit. Capital It is the amount invested by the proprietor in the business. This amount is increased by the amount of profits earned and the amount of additional capital introduced. It is decreased by the amount of losses incurred and the amounts withdrawn. For example, Ali starts business with $.5,00,000. It means that Ali invest capital $.5,00,000 in his business.

Liabilities Liabilities refer to the financial obligations of a business. These denote the amounts which a business owes to others, e.g., loans from banks or other persons, creditors for goods supplied, bills payable, outstanding expenses, bank overdraft etc. Drawings It is the amount of cash or value of goods withdrawn from the business by the proprietor for his personal use. It is deducted from the capital.

Debtors A person (individual or firm) who receives a benefit without giving money or money’s worth immediately, but liable to pay in future or in due course of time is a debtor. The debtors are shown as an asset in the balance sheet. For example, Mr. Ali bought goods on credit from Mr. Basheer for Rs.10,000. Mr. Ali is a debtor to Mr. Basheer till he pays the value of the goods.

Creditors A person who gives a benefit without receiving money or money’s worth immediately but to claim in future, is a creditor. The creditors are shown as a liability in the balance sheet. In the above example Mr. Basheer is a creditor to Mr. Ali till he receive the value of the goods.