Introduction to Basic Accounting Terms

Accounting is a systematic process of recording, classifying, and summarizing financial transactions to provide useful information for decision-making. It is essential for businesses to maintain proper accounting records to track their financial transactions accurately. Some basic accounting terms that are essential to understand are:

1. Assets - Assets are economic resources owned by a company that generate future benefits. Examples of assets include cash, inventory, property, and equipment.

2. Liabilities - Liabilities are obligations that a company owes to others. Examples of liabilities include accounts payable, loans, and mortgages.

3. Equity - Equity is the residual interest in the assets of a company after deducting liabilities. It represents the owner's share of the business.

4. Revenue - Revenue is the income generated from the sale of goods or services.

5. Expenses - Expenses are costs incurred to generate revenue, such as rent, salaries, and utilities.

6. Profit - Profit is the difference between revenue and expenses. It represents the amount of money a company makes after deducting all expenses.

Explanation of Mr Prem's Business

Mr Prem commenced a business of trading in electronic goods with an initial capital of Rupees 15 lakh. Here is how accounting terms apply to Mr Prem's business:

1. Assets - Mr Prem's assets include the inventory of electronic goods he has purchased for resale.

2. Liabilities - Mr Prem may have liabilities if he has taken a loan or bought goods on credit.

3. Equity - Mr Prem's equity is his initial capital of Rupees 15 lakh.

4. Revenue - Mr Prem's revenue is the income he generates from selling electronic goods.

5. Expenses - Mr Prem's expenses include the cost of purchasing goods, rent, salaries, and other business expenses.

6. Profit - Mr Prem's profit is the difference between revenue and expenses. If his revenue is higher than his expenses, he will make a profit.

Conclusion

Understanding basic accounting terms is crucial for anyone starting a business. By maintaining proper accounting records, businesses can track their financial transactions and make informed decisions. Mr Prem's business is an example of how accounting terms apply to a trading business.