What are important Accounting terms?

Assets -

An asset may be defined as anything of use to future operations of the enterprise and belonging to the enterprise. For example, building, land, machinery, cash, debtors (amount due from customers) goodwill etc.

Equity

In broad sense the term equity refers to total claims against the enterprise. It is further divided into two categories:

(i) Owners claim-capital and(ii) Outsiders' claim-liability.(i) Liability: Amounts owed by the enterprise to the outsiders i.e. to all others except the owner. For example, trade creditors, bank overdraft etc.

(ii) Capital: The excess of assets over liabilities of the enterprise. It is the difference between the total assets and the total liabilities of the enterprise. For example, if on a particular date the assets of the business amount to Rs.1,00,000 and liabilities to Rs.30,000 then the capital on the date would be Rs.70,000. It is also known as net worth.

Revenue

It is the monetary value of the products or services sold to the customers during the period. It results from sales, services and sources like interest, dividend and commission, etc.

Expenses / Costs

Expenditure incurred by the enterprise to earn revenue is termed as expenses or costs. Distinction between expense and asset is that the benefit of the former is consumed by the business in present whereas in latter case benefit will be available for future activities of the business. Examples of expenses are raw materials consumed, salaries etc. .

Loss

The term is used to convey, at least, two different meanings. First it refers to the result of the business for a period when expense exceed the revenue. For example, if sales are Rs.10,000 and expenses are Rs.11,000 the loss will be Rs.1,000. Second- It describes those efforts which fail to earn revenue. For example-un saleable stock, loss due to fire, theft, accident etc.

Proprietor/ Owner

The person who invests his money or money's worth and bears the risk of the business.

Drawings

Money or value of goods belonging to business used by the proprietor for his personal use.

Goods

Includes all merchandise commodities which are purchased by the business for selling.

(Trade) Debtor

Person who owes money to the business. It happens when goods are sold on credit.

(Trade) Creditor

Person to whom the business owe money. It happens when goods or materials are purchased by the business on credit.

Transaction

Any exchange (dealing) of goods or services, for cash or on credit by the business with any other business.

Events

There are the occasions which cause changes in the value due to time element. Outsiders are not directly concerned. For example, interest accrued, depreciation in the value of assets etc.

Entry

The record of a transaction or event in the books of accounts is known as entry.

Entity

All elements of financial statements are in relation to a particular entity which may be business enterprise, an educational or charitable organization, a government unit, a natural person or the like. An entity may comprise two or more affiliated entities and may not necessarily correspond, with 'legal entity'. Thus, the accounting information is recorded, compiled and presented with reference to identifiable entity. The term 'other entity' refers to a subsidiary company that is a part of the same entity as its parent company in consolidated financial statements but is an 'other entity' in the separate financial statements of its parent.

Net worth

Is also known as "ownership equity" or "stockholders', equity" or "capital". It is the difference between total assets minus outside liabilities. Alternatively net worth is the sum of capital plus retained earnings.

The Accounting Cycle

After taking decisions such as selecting a business, selecting the form of organization of business, making decision about the amount of capital to be invested, selecting suitable site, acquiring equipment, supplies etc., selecting staff, getting customers and selling the goods etc., business man finally resorts to record keeping.For all types of business organizations, transactions such as purchases, sales, manufacturing and selling expenses, collections from customers and payments to suppliers do take place. These business transactions are recorded in a set of ruled books, such as journal, ledger, cash book etc; In modern times all the records are maintained on a computer using computer software; unless these transactions are recorded properly, he will not be in a position to know where exactly he stands. Therefore, for any business record keeping is of foremost importance.Following is the complete cycle of accounting :-(i) The balances of accounting; from opening balance sheet and day-to-day business transactions of the accounting year are first recorded in a book known as Journal.(ii) Periodically these transactions are transferred to concerned accounts, known as ledger accounts.ii) At the end of every accounting year these accounts are balanced and a trial balance is prepared.(iv) Then the final accounts such as Trading and profit & loss accounts are prepared. (v) Finally a Balance Sheet is made which gives the financial position of the business at the end of the period.

Responsibilities of an accountant

In modem times traditionally, the accountant was expected to compile and present the financial information to the owners of the entity at the end of the accounting period. But with the advent of cost accounting, management accounting and financial management the responsibility and field of accountant's functions have grown enormously.The function of accounting beyond the traditionally accepted double entry routines can be grouped under:(a) Finance function(b) Control function(c) Planning function

Finance function

Every business faces the problem of raising and using the funds. The responsibility of accountant under finance function is to ensure that:

(i) funds are obtained at the lowest cost and(ii) funds are optimally used i.e. highest return is obtained.The following types of problems are faced by the accountant while discharging finance function

• What type of expenditure firms should commit?
• Amount of funds committed by the firm on various projects ?
• What sources should be used to raise the funds for a particular project?
• Ways and means of getting maximum benefit out of the use of funds?
• Method and time of repayment of funds borrowed?

Of course, the decision on the above-mentioned problems is taken in the light of management policy and objectives of the enterprise.

Control function

Accountant has to do the following to discharge his responsibility of being the controller

• To communicate the goals as approved by the management to individuals in their respective fields.
• To make all the managers and various other persons leading their units, aware of their responsibility and assist them in achieving their goals as efficiently as possible.
• Look after the coordination of various activities of all the organizational units so as too optimize results.
• Evaluate the performance and the degree of achievement of various responsibility centers as compared to the goals set for them and assets their efficiency.
• Identify areas of unsatisfactory performance and assist in the formulation of corrective measures at both ends.

Planning function

The process of planning involves long term decision as well as short term actions. In the short- term decision has to be taken regarding:Selection of one alternative out of many e.g.. bicycle manufacturer should decide whether to manufacture all the parts of the bicycle himself or purchase the parts and only to assemble.

Profit maximization or loss minimization.

For problems involved in planning function accountant has to depend not only on accounting information but also on outside information. As regards long term planning, the task is to plan for continuity and development of the firm.

Importance of data in accounting

The term "data" refers to primary details or numerical facts relating to an event or transaction. Data is stored and maintained on a computer or network. Computer Software like HiTech Financial Accounting process this electronic data. Data is also maintained as hardcopy or paper print. Since accounting limits itself only to those transactions and events which are financial in character, therefore, accounting data will consist of facts, financial in nature, relating to transactions and events of a business entity for the accounting period. Moreover, accounting data must be supported by documentary evidence. Thus, documents known as vouchers, support the data. Usually data is disorganized and disjointed in its raw form. It is not capable of being understood. So, accounting processes raw data into finished form of "information" to make it useful and meaningful, capable of being used in decision taking process by the various users of accounting information.Thus accounting data processed by the accounting cycle produces accounting information. Data is collected, recorded, classified, grouped, valued, tabulated, arranged, summarized in order to present the same in the form of information for its use by the users to enable them to take decisions.Accounting data Consists of financial transactions and events relating to an entity for the accounting period supported by documentary evidence (vouchers). For example receipts and payments are documented by payee's receipt purchases by invoice, sales by outwards invoice, returns inwards by credit note; returns outwards by debit note; expenses by bills or payment rolls etc.Thus the first and the most important function of accounting is to collect the data supported by the vouchers to ensure the authenticity of the same. Accounting processes consist of recording in the books of original entry (journal or sub- journals); classifying (posting into ledger) grouping (putting transactions of similar nature at one place in one account) valuing (finding the value at year end by balancing or valuing) tabulating (preparing list of balances and checking arithmetical accuracy) and preparing financial statements (Trading and Profit and loss account; Balance Sheet) in report form to communicate the information. Now-a-days computer accounting software can manage this task very efficient in a matter of short time. Accounting information is presented mostly in the form of financial statements like Income statement (Trading and Profit & Loss account) Position statement (Balance sheet). Now-a-days statement of changes in financial position; value added statement; report on Human resources accounting; Social performance report etc. form part of accounting information

Difference between Data and Information

Data

1. Refers to details, facts about any event.2. Is, generally, disorganized and disjointed in the form.3. Is in raw-form and is the input of accounting.4. Cannot be understood or made use of by the users.5. It does not depend upon information.

Information

1. Refers to only those events which are concerned with entity.2. Is properly arranged, classified and organized.3. Is in the finished form and is the output of accounting.4. Is understood and used by the users of accounting information for taking theirdecisions.5. Information is based upon and derived from data.

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I endorse your answer  MR VINOD JETELY

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