TERMS AND CONCEPTS

PUNJAB COLLEGE OF COMMERCE PROF. HAFIZ MUHAMMAD NAWAZ PAGE 1

DEFINE BUSINESS Any legal activity which is doing for the purpose of earning profit is called business. TYPE OF BUSINESS

Manufacturing Trading Servicing

TYPE OF BUSINESS ORGANIZATION Trading Partnership Joint stock company

DEFINE TRANSACTION Any dealing between two or more person which can change the financial position of the business is called transaction. Type of transactions

Cash Transaction Credit Transaction

DEFINE BOOK KEEPING. Recording of business transactions in books of account in prescribed manner

DEFINE ACCOUNTING. Accounting is an art of recording, clarifying, summarizing and interpreting the results from financial statements DEFINE PROPRIETOR. He is the owner of the business. He gives time and invests money into the business DEFINE CAPITAL. The amount of cash or the value of goods or both invested by the owner in establishing his business is known as capital.

or Owner contribution in business assets is called capital DEFINE THE TERM DRAWING. Withdrawal of cash or goods from the business for private and personal use of the owner is called drawing.

WHAT IS GOODS (MERCHANDISE)? Anything which is purchased for resale purpose are called goods e.g. cloths are goods for cloth merchant DEFINE PURCHASES. Goods purchased are called purchases, purchases are of two type

Cash Purchases Credit Purchases

DEFINE CASH PURCHASES. Goods purchased for cash are called cash purchases DEFINE CREDIT PURCHASES. Goods purchases on credit are called credit purchases. DEFINE PURCHASES RETURN / RETURN OUTWARD / RETURN TO SUPPLIER. If goods purchased are returned to the supplier, it is called purchases return. The good are returned when they are:

Defective Not according to sample Damaged Excess of the quantity ordered for

TERMS AND CONCEPTS

PUNJAB COLLEGE OF COMMERCE PROF. HAFIZ MUHAMMAD NAWAZ PAGE 2

DEFINE PURCHASES ALLOWANCE. If the purchaser informs the supplier that some goods are defective and the supplier reduce some amount. This reduction in price is known purchase allowance. WHAT IS SALES ALLOWANCE? If the customer informs the seller that some goods are defective and seller reduced some amount this reduction in prices is known as sales allowance. WHAT IS SALES? Goods sold are called sales. Sales are of two kinds;

Cash sales Credit sales

WHAT IS CASH SALES? Goods sold for cash are called cash sales WHAT IS CREDIT SALES? Goods sold on credit are called credit sales. WHAT IS SALES RETURN (RETURN INWARD)? If the customer returns the goods it is called sales return goods returned when they are

Defective Not according to sample Damaged Excess of the quantity ordered for

WHAT IS STOCK (INVENTORY)? Unsold goods are called stock / inventory

DEFINE VOUCHER Written evidence in support of business transaction e.g

Cash memo Invoice Cash receipt voucher Cash payment voucher

DEFINE CASH MEMO. Written evidence in support of cash transaction WHAT IS INVOICE? Written evidence in support of a credit transaction

WHAT IS DEBTORS (ACCOUNT RECEIVABLE)? Debtors (account receivable) are those persons from whom the amount is receivable for goods sold on credit. WHAT IS CREDITORS (ACCOUNTS PAYABLE)? Creditors (account payable) are those persons to whom the amount is payable for goods purchased on credit.

WHAT IS DISCOUNT? Reduction in the price of non-defective goods

Trade discount Cash discount

o Discount allowed / Sale Discount o Discount received / Purchases Discount

TERMS AND CONCEPTS

PUNJAB COLLEGE OF COMMERCE PROF. HAFIZ MUHAMMAD NAWAZ PAGE 3

WHAT IS ALLOWANCE? Reduction in the price of defective goods

Purchases allowance Sales allowance

WHAT IS TRADE DISCOUNT? It is deduction allowed by a trader on the lit price of the goods. It is not recorded in books of account WHAT IS CASH DISCOUNT? Deduction allowed by a creditor to his debtor for making prompt payment is called cash discount Types of cash discount

Discount allowed Discount received

WHAT IS ASSETS? Valuable things posses by the business are called asset e.g. building, machinery, furniture etc DEFINE LIABILITIES Outsider contribution in business assets are called liabilities

or These are the amounts payable by the business e.g. bank loans and creditor DEFINE EXPENSES Expense is an expired portion of acquisition price.

or Cost of goods and services used up in the process of generating income.

Rent paid Salaries paid Wages paid Interest paid

DEFINE EXPENDITURE The cost of acquiring the assets are called expenditure

DEFINE INCOME (REVENUE) It is the price of goods sold or services rendered by the business e.g.

Rent received Interest received Commission received Sales

WHAT IS CASH TRANSACTIONS? If the value of transaction is met in cash immediately it is called cash transaction. WHAT IS Credit Transactions? If the value of transaction is not met in cash immediately it is called credit transaction. WHAT IS COMMISSION? It is remuneration for services rendered by one person to another person WHAT IS DOUBLE ENTRY SYSTEM? A system in which two fold aspect (Dr & Cr) of transaction are recorded

TERMS AND CONCEPTS

PUNJAB COLLEGE OF COMMERCE PROF. HAFIZ MUHAMMAD NAWAZ PAGE 4

DEFINE EQUITY Claim against business assets. Equity is of two types Owner equity / capital (owner contribution in business assets) Outsider equity / liabilities (outsider contribution in business assets) WHAT IS DRAWINGS? Cash or Goods withdrawn by the owner from the business for personal use is called drawings HOW MANY TYPES OF ACCOUNTING?

Financial accounting Management accounting Cost accounting

WHAT IS FINANCIAL ACCOUNTING? It is an accounting which is used to calculate the profit or loss and observe the financial position of the business WHAT IS COST ACCOUNTING? It is an accounting which is used to calculate cost of product WHAT IS MANAGEMENT ACCOUNTING? It is an accounting which is used for the decision making WHAT IS CASH SYSTEM OF ACCOUNTING? It is a system in which accounting entries are made only when cash received or paid WHAT IS ACCRUAL SYSTEM OF ACCOUNTING? It is a system in which accounting entries are made when transaction carried, whether on cash or on credit DEFINE CASH SYSTEM OF ACCOUNTING It is a system in which accounting entries are made when cash is received or paid PARTIES INTERESTED IN ACCOUNTING INFORMATION?

Creditors Debtors Owners Teachers Students Government Employees

WHAT IS SINGLE ENTRY SYSTEM? A system in which only one effect of transaction is recorded or two effect of transaction is recorded or sometime no effect of transaction is recorded

DEFINE DOUBLE ENTRY SYSTEM? A system in which two fold aspect ( Dr & Cr) of each transaction is recorded.

TERMS AND CONCEPTS

PUNJAB COLLEGE OF COMMERCE PROF. HAFIZ MUHAMMAD NAWAZ PAGE 5

DEFINE ACCRUAL SYSTEM OF ACCOUNTING It is a system in which accounting entries are made on the basis of amount having become due for payment or receipt. WHAT IS FUNDAMENTAL ACCOUNTING EQUATION? ASSETS = LIABILITIES + CAPITAL WHAT IS MEANT BY THE TERM CONCEPT IN ACCOUNTING? Accounting concept means the basic assumptions upon which accounting is based DEFINE BUSINESS ENTITY CONCEPT. According to this concept business is treated as separate person from its owner

DEFINE GOING CONCERN CONCEPT. According to this concept business will continue for a long period of time DEFINE MONEY MEASUREMENT CONCEPT. According to this concept we record only those transactions which can be measured in term of money

DEFINE COST CONCEPT According to this concept an asset is recorded in the books at the price at which it was acquired DEFINE DUAL CONCEPT According to this concept every transaction have two effect (one is Dr & other is Cr)

DEFINE ACCOUNTING PERIOD According to this concept life of a business is divided into small segment (1 Year) and each small segment is called accounting period e.g. 1ST JANUARY 2005 -------------------------- 31ST DECEMBER 2005 DEFINE MATCHING CONCEPT The concept of offsetting expenses against revenue is called matching concept

or According to this concept expense are match with income, we should consider only those expenses which are incurred to generate income of that period

Net profit (Year2005) = Income (Year 2005) Vs Expenses (Year 2005) DEFINE REALIZATIONS CONCEPT Revenue should be recognized at the time when goods are sold or services are rendered. DEFINE THE TERM CONVENTION. It means those customs or traditions which guide the accountant in maintaining the accounting record. DEFINE CONVERSION OF DISCLOSURE. It means important information relating to transaction must be disclosed. DEFINE THE CONVENTION OF MATERIALITY. It means we should record only those events which are significant and insignificant events should be ignored.

TERMS AND CONCEPTS

PUNJAB COLLEGE OF COMMERCE PROF. HAFIZ MUHAMMAD NAWAZ PAGE 6

DEFINE CONVENTION OF CONSISTENCY. It means that accounting practice should remain unchanged from one period to another.

DEFINE CONVENTION OF CONSERVATISM. It means that uncertain and risk inherit in business transaction should be given a proper consideration.