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Accounting Terminology

Introduction to Financial Accounting MBA Batch 2011-13

What are going to learn

Assets
Current/Floating assets Fixed assets Tangible assets Intangible assets

Liabilities
Current liabilities Long-term liabilities

Capital

What are going to learn


Drawings Sales Purchases

Assets
Assets represent everything which a business owns and has money value. They carry probable future benefits. Classified into:

Fixed assets Current assets

Current assets

Those assets which are held:


In the form of cash For their conversion into cash For their consumption in the production of goods or rendering of services in the course of the business

E.g.
Stock/inventory raw materials, work-in-progress, finished goods Debtors Bills receivable Cash at bank Cash in hand Prepaid expenses Short-term investments/marketable securities Accrued income

Fixed assets
Held for the purposes of providing or producing goods or services and those that are not held for resale in the normal course of business Classified into:

Tangible fixed assets Intangible fixed assets

Tangible fixed assets


Fixed assets which can be seen and felt by touch. E.g.

Land Building Plant & machinery Furniture & fixtures

Intangible fixed assets


Fixed assets which cannot be seen and touched. E.g.

Goodwill Patent Trademark Copyright

How to determine whether an assets is a current asset or fixed asset?


Verify the purpose for which the asset is held in the hands of the user

Three questions

1. Cash or bank balance ? 2. Converted into cash ? 3. Consumed in the production of goods in the normal course of business? All Negative FIXED ASSET Any one positive CURRENT ASSET

How to determine whether an assets is a current asset or fixed asset?


Qs. Cash Stock of Stock of Debtors finished raw & B/R goods materials 1 Yes No No No 2 No Yes No Yes 3 No No Yes No Result CA CA CA CA Land & building

No No No FA

Liabilities
Financial obligations of an enterprise other than owners funds. Classified into:

Current Liabilities Long term liabilities

Current liabilities

Those liabilities which fall due for payment in a relatively short period, (normally, a period of not more than 12 months) E.g.
Trade creditors Bills payable Outstanding expenses Bank overdraft Income received in advance Short terms loans

Long term liabilities


Those liabilities which do not fall due for payment in a relatively short period. E.g.

Long-term loans from banks Long-term loans from financial institutions Debentures

Capital
Amount invested in an enterprise by the proprietors. This amount is increased by the amount of profits earned and the amount of additional capital introduced and is decreased by the amount of losses incurred and the amount withdrawn (whether in cash or in kind). Also known as owners equity or net worth.

Drawings

Total amount of cash or goods or any other asset withdrawn by the proprietor for personal use.

Sales
The amount for which goods are sold or services are rendered. The sales may be for cash or credit E.g.

An ice-cream seller sold 10 cones on Sunday @ Rs. 20 each. His total sales for Sunday will be Rs. 200

Purchases
The total amount of goods obtained by an enterprise for resale or for use in the production of goods or rendering of services in the normal course of business. The purchases may be for cash or for credit. E.g.

An ice-cream seller bought 200 cones from the distributor @ Rs. 11 each. His total purchases are Rs. 2200.

Stock or inventory
Tangible property held for sale in the ordinary course of the business or for consumption in the production of goods or rendering of services for sale. Types:

Raw materials Work-in-progress or semi-finished goods Finished goods

Stock or inventory
May be opening stock or closing stock Opening stock

Goods lying unsold at the beginning of the current accounting period

Closing stock
Goods lying unsold at the end of the current accounting period

Trade debtors

Persons from whom the amounts are due for goods sold or services rendered on credit basis.

Trade creditor

Persons from whom the amounts are due for goods purchased or services rendered on credit basis

Bill of exchange
Instrument in writing Unconditional order Signed by the maker Directing a certain person to pay a certain sum of money to a definite person or to the bearer of that instrument.

Bills receivable

The bill of exchange is known as bills receivable for the creditor.

Bills payable

The bill of exchange is known as bills payable for the debtor

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