Thursday, 26 October 2017

Basic Accounting Terms - 1 | Accounting 101 terms | Accounting Terms for Dummies

Basic Accounting Terminologies-

Capital: Capital means an amount invested by the owner in the business. Investment by the owner can be in the form of cash or in kind. For example, if the owner uses personal furniture for the business it will be recognized as the capital

Liability: Liability is something which the business owes. For example, a loan from a bank.

Current liabilities: Current liabilities are the liabilities which the business has to pay within a year. These are short-term liabilities. For example, trade creditors. Trade Creditors are the suppliers from whom we purchase the goods on credit. Usually, the payment to trade creditors is made within one year. Other examples of current liabilities are outstanding(unpaid) salaries, tax payable, etc.

Non-Current Liabilities: Non-Current Liabilities are long term liabilities which are not repayable within one year. For example, Long term loan taken for say five years.

Contingent Liability: Contingent Liability is that kind of a liability which is non-existent as on date, but it may become an actual liability in the future. For example, if a customer has filed a suit against the company for some compensation. This can become an actual liability in the future if the firm loses the case. However, as on date, it is not a liability as the outcome is not known today

Asset: Asset means something which the business owns. For example, plant and machinery, land and building, furniture and fixtures, Investments etc.

Fixed Assets: Fixed assets are long-term assets. These are assets which are purchased for use over a long period of time (generally more than one year).  For example, land and building, plant and machinery, furniture and fixtures, etc.

Current Assets: These are short-term assets. Current assets are assets which are expected to be converted to cash within a year. For example, Debtors. Debtors are the customers to whom we sell the goods on credit. Generally, the amount receivable from debtors is received within a year's time. Current assets are also referred to as 'Floating Assets'

Liquid Assets: Liquid assets include cash and all other assets which can be converted into cash at very short notice. These are the assets which can be disposed of quickly. They are also called quick assets. For example, cash in hand, cash at bank, shares etc.

Tangible Assets: These are assets which have a physical existence. We can touch, see or feel these assets. For example, plant and machinery

Intangible assets: These are the assets which do not have any physical existence. It is not possible to see, touch or feel them. For example, Goodwill (Goodwill is the reputation of the firm expressed in terms of money).

Fictitious Assets: As the name suggests, these are not assets in a true sense. These are imaginary assets which do not have any exchange value. You cannot realise cash from such assets. These generally include some one time heavy expenses which are not considered as an expense only in the year in which they were incurred. Rather, these expenses are shown as expenses over a few accounting years. If the entire amount of these expenses is considered as an expense in the year of occurrence, these expenses may result in a big loss in that particular year. So these expenses are spread out over a few years. For example, preliminary expenses. These are expenses incurred at the time of starting the business. If the entire amount of preliminary expenses is assigned to the first year only, it would result in a huge loss in the first year itself. So instead of treating the entire amount of preliminary expenses as an expense of the first year, these expenses would be spread out over a few accounting years. For example, say preliminary expenses are Rs.100/-. So what the firm may do is spread it over a period of say 5 years. So in the first year, only Rs.20/- (Rs.100 divided by 5) would be considered as preliminary expenses and balance Rs.80/- would be shown as an asset (fictitious asset) in the first year. During the second year, again Rs.20/- will be considered as preliminary expenses and balance Rs.60/- would be shown as an asset (fictitious) in the second year, so on and so forth. Thus, such expenses are spread out over a period of accounting years.

Depreciation - The word depreciation has been derived from the Latin word 'Depretium' which means 'decline' or 'reduction' in price or value. Depreciation is a continuous, gradual and permanent decrease in the value of fixed assets. For example, machinery purchased today will not have the same value after 5 years, even if it is unused. This reduction in the value of machinery is called Depreciation.

Balance Sheet - A balance sheet is a statement that shows a company's assets and liabilities as on a particular date. The balance sheet gives an idea as to what the company owns and owes. In simple words, it shows the financial health of the business

Goodwill - Goodwill is the monetary value of the reputation of the firm. Some firms develop a good reputation in the market over a period of time. For example, Tata Group companies, L & T, Google, etc. Such reputation, expressed in monetary terms is called Goodwill. This reputation helps these firms to earn more profits as compared to a newly started business.

Bad Debts - Bad debts refer to irrecoverable dues (from the debtors). For example, suppose you have sold the goods worth Rs.10,000/- to Mr.X on credit. But he is able to repay only Rs.9000/-. In such a case, Rs.1,000/- would be considered as bad debts. Bad debt is a loss to the business which reduces its profit.

Read Further - Basic Accounting Terms II