DEFINITION OF ACCOUNTING TERMS
| By the end of the subtopic, leaners should be able to: |
- Define various accounting terms.
- Give examples of various terms in accounting.
- Explain the meaning of various accounting terms.
|
Capital
- These are resources brought in for use in the business by the owner or investor and may be in the form of money or tangible assets.
Example:
- T. Chandalala brought in $20 000 cash into the business and two motor vans valued at $88 000 each for use in the business.
- From the above the total capital will be valued at $196 000. This means that the value of resources brought to start the business by T. Chandalala is $196 000.
Assets
- These are resources owned by a business.
- Examples of assets may include buildings, cash, debtors, motor vehicles and machinery.
- Resources brought in by the owner are equal to resources owned by a business, hence:
Non-current (fixed) assets
- These are resources with a life longer than one year, bought for use in the business and not with the intention of reselling them.
- Fixed assets can either be tangible or intangible. Buildings, motor vehicles, office furniture, goodwill, patents, plant and machinery are good examples.
Current assets
- Current assets may consist of stock, debtors, prepayments, bank or cash held by the business.
- Current assets are those resources which have a short life span usually not more than a year.
- They can also be defined as those resources that can easily be converted into cash.
Liabilities
- These are lawfully binding debts of the business that are payable to another party or business entity.
- When the capital of the business is not sufficient, it may borrow so that it can purchase more assets.
- This can be represented by the following accounting equation:
Assets = Capital + Liabilities
- Liabilities can be long term or short term.
Current (Short term) liabilities
- These are debts incurred by the business that will have to be paid within a period of one year, hence the term short term.
- Current liabilities can be in the form of bank overdrafts, accrued expenses and creditors.
Non-current (Long term) liabilities
- These are debts incurred by the business that can be repaid over a period of more than one year.
- Debentures, long term loans and mortgage loans are good examples of non-current liabilities.
Source documents
- These are documents where transactions are recorded first before they are entered in any books of accounts.
- Whenever there is an exchange of goods between two parties or provision of services, documentation of the transactions is issued to the receiver. This is known as a source document.
- Source documents act as proof that a transaction has taken place.
- Examples of source documents include receipts, invoices, bank statements, vouchers, debit and credit notes.
Double entry bookkeeping
- This is an accounting concept which states that, a single transaction is recorded twice in the ledger, once on the debit side of the receiving account and once on the credit side of the giving account.
Ledger Account
- A ledger account is a record of a transaction found in a ledger book.
- Information from all books of prime entry is posted to the respective accounts in the ledger.
Purchases
- These are goods, stocks or merchandise bought by the business with the intention of reselling them.
- Purchases should not be confused with assets, assets are bought for use whereas purchases are bought for resell.
- A car sales company trades in cars, hence its purchases will be in the form of cars. Likewise a supermarket trades in groceries, so its purchases will be in the form of groceries.
Sales
- These are goods sold to customers.
- Sales only include goods bought for resale (purchases).
- Sale of fixed assets and other items in the business are not regarded as sales.
Expenses
- Expenses are costs incurred by the business to carry on its operations.
- This includes costs incurred in the maintenance of fixed assets.
Stock or inventory
- Stock is the value of unsold goods of a business at particular trading period.
- In accounting, they are two types of stock that is:
- Opening stock - stock available at the beginning of a financial trading period.
- Closing stock - stock at the end of a trading period.
Debtors or Accounts Receivables
- Debtors are customers who buy goods or enjoy services on credit.
- Debtors are classified under current assets in the balance sheet.
Creditors or accounts payables
- A creditor is a person or business who is owed money for goods or services supplied.
- Creditors are classified as current liabilities in the balance sheet.
