session 5 finance

8/13/2019 Session 5 Finance

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1. Business Transaction

2. Assets

3. Capital

4. Equity or Liability

5. Financial statements

6. Accounting equation7. Goods cost

8. Purchases

9. Sales

10. Purchase return or return outward

11. Sales Return or Return Inward

12. Stock

13. Revenue

14. Expenses

15. Expenditure


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16. Losses17. Profit18. Income19. Gain20. Debtors21. Creditors22. Receivable

23. Payable24. Proprietor25. Drawings26. Solvent27. Insolvent28. Vouchers29. Accounting year30. Entry


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The economic event that relates to a businessentity is called business transaction

Special features of Business transactions are asunder:

(I) Business transactions must be financial innature

(ii) Business transactions must be supported bydocumentary evidence.

(iii) Business transactions must be presented innumerical monetary terms.

(iv) Business transactions must cause an effect onassets, liabilities, capital, revenue and expenses.


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The valuable things owned by the business are known as assets.

(a) Fixed assets. These assets are acquired for long term use in thebusiness.

(b) Current assets. These assets, also known as circulating, fluctuating orfloating assets change their Values constantly

(c) Fictitious assets Fictitious assets are those assets, which do not havephysical form

(d) Tangible assets. Assets having physical existence which can be seenand touched are known as tangible assets.

(e) Intangible assets. These are the assets which are not normallypurchased and sold in the open market such as goodwill and patents.

(f) Wasting assets. Assets, whose value goes on declining with thepassage of time are known as wasting assets. Mines, patents andassets taken on lease are its examples.

(g) Liquid assets. Liquidity refers to convertibility in cash. Liquid assets,therefore are those assets, which can be converted into cash at shortnotice. The examples of liquid assets are cash in hand, cash at bank,debtors, bills receivable etc. In other words, liquid assets are currentassets less stock i.e.,


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Liabilities are the obligations or debts payable by theenter rise in future in the form of money or goods. Itis the proprietors' and creditors' claim against theassets of the business. Creditors may e classified ascreditors for goods and creditors for expenses. Thebusiness should have sufficient current assets t? meetits current liabilities and reasonable amount of fixedassets to meet its fixed liability. Liabilities can beclassified as under:

1. Liability to owners or Owners Equity (Capital)2. Liability to Creditors or Creditors EquityA. Creditor for GoodsB. Creditor for loansC. Creditors for expenses


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Statements prepared by an enterprise at theend of accounting year to assess the status ofincome and assets is termed as Financialstatement. It is categorized as Income

statement and Position statementtraditionally known as Profit and LossAccount and Balance Sheet.


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Accounting rotates around three basic terms.These terms are Assets, Liabilities andCapital. The true inter-relationship betweenthese terms is represented as Accounting

Equations i.e.,

Assets= Liabilities + Capital


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Articles purchased for sale at profit orprocessing by the business or for use in themanufacture of certain other goods as rawmaterial are known as good In other words,

goods are the commodities, in which thebusiness deals. Furniture will be goods forthe firm dealing in furniture but it will be anasset for the firm dealing in stationery.


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The ultimate end of the goods purchased ormanufactured by the business is theirsales...It includes both cash and credit sales.In accounting terminology, sales means the

sale of goods, never the sale of assets, salesshould have a regular feature. The-sales often sofa sets by Ahmad, a furnisher is salesbut sale of old furniture by Sarin, a stationerydealer will not be a sale.


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It is that part of the purchases of goods,which is returned to the seller. This returnmay be due to unnecessary, excessive anddefective supply of goods. It may also result,

if the supplier violates the terms andconditions of the order and agreement. Inorder to calculate net purchases, purchasereturn is deduced from purchases. Purchasesreturns are also known as returns outward,because it is the return of goods outside thebusiness.


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The goods available with the business for sale on aparticular date is termed as stock. It varies i.e., increases

or decreases and goes on changing. In accounting, we usethe term stock widely as opening and closing stock. Incase of business which is being carried on for the last somany years, the value of goods on the opening day of theaccounting year is known as opening stock. In the sameway, the value of goods on the closing day of the

accounting year will be closing stock. For example, Mohanand Sons started their business on Jan. 1, 1986 anddecided to close their books on 31st December every year.The firm will not have any opening stock on Jan. 1, 1986,because the business did not exist before Jan. 1, 1986. Ifthe firm has goods worth Rs. 50,000 on 31st December,1986, it will be the closing stock on this date. On January1, 1987, the closing stock of December 31, 1986 will bethe opening stock of the year 1987. It should always bekept in mind that stock is valued at cost price or marketprice, whichever is lower.


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Revenue in accounting means the amountrealized or receivable from the sale of goods.Amount received from sale of assets orborrowing loan is not revenue. In Wider

sense, revenue is also used to mean receiptof rent, commission and discount etc. Suchreceipts should be revenue receipts. It shouldbe concerned with the day-to-day affairs ofthe business. It should also be regular innature.


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Losses are unwanted burden which the business isforced to bear. Loss of goods due to theft or fire, orflood or storm or accidents are termed as 'loss' inaccounting. Losses are different from expenses in thesense that expenses are voluntarily incurred togenerate income where losses are forced to bear.

Losses may be classified as normal and abnormal.Normal loss is due to the inherent weakness in thecommodities i.e., coal, cement, oil, ghee, ice, petrol.There will be shortage in their weight due to leakage,

melt age, evaporation, spoilage and wastage duringthe journey. Abnormal loss on the other hand, is anextra ordinary loss due to earthquake, fire, flood,storm, theft and accidents.


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The term 'debtors' represents the persons orparties who have purchased goods on creditfro us and have not paid for the goods sold tothem . They still owe to the business. For

example, if goods worth Rs. 20,000 havebeen sold to Mahesh, he will continue toremain the debtor of the business so far hedoes not make the full payment. In case, hemakes a payment of Rs. 16,000, he willremain to be debtor for Rs. 20,000 - 16,000= 4,000.


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In addition to cash purchases the firm has tomake credit purchases also. The sellers ofgoods on credit to the firm are known as itscreditors for goods. Creditors are the liability

of the business. They will continue to remainthe creditors of the firm so far the fullpayment is not made to them. Liability tocreditors will reduce with the payment made

to them.


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Receivable means, what business has toreceive from outside parties on revenueaccount. When We sell goods on credit,purchasers are known as debtors. Certain

debtors accept bills drawn by us and becomepart of bills receivable. The total of Debtorsand Bills Receivable is known as Receivables.These are current assets and realized within a

year. Receivables are shown at the assets sideof the Balance Sheet.


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Payable means, what the business has to payto outside parties. When we purchase goodson credit sellers are known as creditors. Weaccept bills drawn by certain creditors, which

becomes a part of Bill Payable. The total ofCreditors and bills Payable is termed asPayables. It is shown at the liabilities side ofthe Balance Sheet.


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An individual or group of persons who undertakethe risk of the business are known as proprietorThey invest their funds into the business ascapital. Proprietors are adventurous persons whomake arrangement of land, labour, capital and

organization. They pay wages to labour, rent toland, interest to capital and salary toorganization. After meeting all the expenses ofbusiness, if there remains any surplus, it isknown profit. The proprietor is rewarded withprofit for the risk undertaken by him. If expensesexceed revenue the deficit is a loss to be borneby the proprietor.


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Amount or goods withdrawn by the proprietor for hisprivate or personal use is termed as drawing. Thecost of using business assets for private or domesticuse is also drawing. Use of business car for domesticuse or use of business premises for residential

purpose is also drawing. Acquiring personal assetswith business funds is also drawing. Certainexamples of drawings are as under:

(a) Amount withdrawn by proprietor for personal use(b) Goods taken by the proprietor for domestic use.

(c) Purchasing pocket transistor for proprietor's son. (d) Using business vehicles for domestic use.

(e) Using business premises for residential purpose.


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Solvent are those persons and firms who arecapable of meeting their liabilities out of theirown resources. Solvent firms have sufficientfunds and assets to meet proprietors' and

creditors' claim. Solvent shows the financialsoundness of the business.


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All business firms who have been sufferinglosses for the last many years and are not evencapable of meeting their liabilities out of theirassets are financially unsound. Only the court candeclare the business firm as insolvent if it issatisfied that the continuation of the firm will beagainst the interest of the public or creditors. Nofirm can declare itself as insolvent. In case ofsolvency, the assets of the business are sold and

liabilities paid with the funds realized from thesale of assets. If the funds realized fall short ofthe liabilities creditors are paid proportionately.


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Accounting transactions must be supported bydocuments. These documentary proofs insupport of the transactions are termed asvouchers. It may be a receipt, cash memo,invoice, wages bill, salaries bill, or any document

as an evidence of transaction having taken place.The contents of vouchers are date, amount paid,purpose of the payment, payment passed bycompetent authority, payment made andcancelled the voucher. Vouchers are the basis ofaccounting record. They facilitate accountingVouchers are also used for verification andauditing of business records.


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session 5 finance

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