4. Basic Accounting Terms - Finanace & Accounting MCQ

Business entity means a specifically identifiable business enterprise like Super Bazaar, Hire Jewellers, ITC Limited, etc. An accounting system is always devised for a specific business entity (also called accounting entity).

An event involving some value between two or more entities is known as transaction. It can be a purchase of goods, receipt of money, payment to a creditor, incurring expenses, etc. It can be a cash transaction or a credit transaction.

• “Assets are future economic benefits, the rights, which are owned or controlled by an organization or individual”. – Finny and Miller .
• Assets are economic resources of an enterprise that can be usefully expressed in monetary terms. Assets are items of value used by the business in its operations. For example, Super Bazar owns a fleet of trucks, which is used by it for delivering foodstuffs; the trucks, thus, provide economic benefit to the enterprise. This item will be shown on the asset side of the balance sheet of Super Bazaar. Assets can be broadly classified into two types: current and Non-current
• This can be expressed as: Assets = Liabilities + Capital

After selling the goods on credit basis the debtors may be given certain deduction in the amount due in case if they pay the amount within the stipulated period or earlier, this type of discount is known as Cash Discount. This deduction is given at the time of payment on the amount payable. Cash discount acts as an incentive that encourages prompt payment by the debtors.

Debtors are persons and/or other entities who owe to an enterprise an amount for buying goods and services on credit. The total amount standing against such persons and/or entities on the closing date, is shown in the balance sheet as sundry debtors on the asset side.

Liabilities are obligations or debts that an enterprise has to pay at some time in the future. They represent creditors’ claims on the firm’s assets. Both small and big businesses find it necessary to borrow money at one time or the other, and to purchase goods on credit. Super Bazar, for example, purchases goods for  ₹10,000 on credit for a month from Fast Food Products on March 25, 2020. If the balance sheet of Super Bazaar is prepared as at March 31, 2020, Fast Food Products will be shown as creditors on the liabilities side of the balance sheet. If Super Bazaar takes a loan for a period of three years from Delhi State Co-operative Bank, this will also be shown as a liability in the balance sheet of Super Bazaar. Liabilities are classified as current and non-current

Money owed by a business to its suppliers is known as Accounts Payables (AP) 

Offering deduction of agreed percentage on list price at the time of selling goods is known as Trade Discount. It is generally offered by manufactures to wholesellers and by wholesellers to retailers.

Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner for the business entity capital is an obligation and a claim on the assets of business. It is, therefore, shown as capital on the liabilities side of the balance sheet.

Sales are total revenues from goods or services sold or provided to customers. Sales may be cash sales or credit sales.

The debts which are to be repaid within a short period (a year or less) are referred to as Current Liabilites

Costs incurred by a business in the process of earning revenue are known as expenses. Generally, expenses are measured by the cost of assets consumed or services used during an accounting period. The usual items of expenses are: depreciation, rent, wages, salaries, interest, cost of heater, light and water, telephone, etc.

The excess of revenues of a period over its related expenses during an accounting year is profit. Profit increases the investment of the owners.

Stock (inventory) is a measure of something on hand-goods, spares, and other items in a business. It is called Stock in hand. In a trading concern, the stock on hand is the amount of goods that are lying unsold as at the end of an accounting period is called closing stock (ending inventory). In a manufacturing company, closing stock comprises raw materials, semi-finished goods, and finished goods on hand on the closing date. Similarly, opening stock (beginning inventory) is the amount of stock at the beginning of the accounting period.

The excess of expenses of a period over its related revenues its termed as loss. It decreases in owner’s equity. It also refers to money or money’s worth lost (or cost incurred) without receiving any benefit in return, e.g., cash or goods lost by theft or a fire accident, etc. It also includes loss on sale of fixed assets.

Discount is the deduction in the price of the goods sold. It is offered in two ways i.e in the form of Trade Discount and Cash Discount.

Trade Discount: Offering deduction of agreed percentage of list price at the time of selling goods. It is generally offered by manufactures to wholesellers and by wholesellers to retailers.

Cash Discount: After selling the goods on credit basis the debtors may be given certain deduction in the amount due in case if they pay the amount within the stipulated period or earlier. This deduction is given at the time of payment on the amount payable. Cash discount acts as an incentive that encourages prompt payment by the debtors.

The documentary evidence in support of a transaction is known as voucher. For example, if we buy goods for cash, we get cash memo, if we buy on credit, we get an invoice; when we make a payment we get a receipt and so on.

Goods refers to the products in which the business unit is dealing, i.e. in terms of which it is buying and selling or producing and selling. The items that are purchased for use in the business are not called goods. For example, for a furniture dealer purchase of chairs and tables is termed as goods, while for other it is furniture and is treated as an asset. Similarly, for a stationery merchant, stationery is goods, whereas for others it is an item of expense (not purchases)

Withdrawal of money and/or goods by the owner from the business for personal use is known as drawings. Drawings reduces the investment of the owners.

Capital expenditure (CapEx) or capital expense is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. Capital expenditure (CapEx) is a payment for goods or services recorded—or capitalized—on the balance sheet instead of expensed on the income statement. CapEx spending is important for companies to maintain existing property and equipment, and invest in new technology and other assets for growth

Creditors are persons and/or other entities who have to be paid by an enterprise an amount for providing the enterprise goods and services on credit. The total amount standing to the favor of such persons and/or entities on the closing date are shown in the Balance Sheet as sundry creditors on the liabilities side.

Accounts receivable (AR) are legally enforceable claims for payment held by a business for goods supplied and/or services rendered that customers/clients have ordered but not paid for. These are generally in the form of invoices raised by a business and delivered to the customer for payment within an agreed time frame.

Contingent liabilities are liabilities that may be incurred by an entity depending on the outcome of a future event such as a court case.These liabilities are not recorded in a company’s accounts and shown in the balance sheet when both probable and reasonably estimable as ‘contingency’ or ‘worst case’ financial outcome. A footnote to the balance sheet may describe the nature and extent of the contingent liabilities. E.g. Destruction by Flood, Income tax Disputed, Sales tax Disputed etc.

Revenue Expenditure is that part of expenditure that does not result in the creation of assets. E.g. Payment of salaries, wages, pensions, subsidies and interest. Also, note that revenue expenses are incurred by the government/organisation for its operational needs. Hence, an expenditure is revenue in nature, when it benefits the current period.

Purchases are total amount of goods procured by a business on credit and on cash, for use or sale. In a trading concern, purchases are made of merchandise for resale with or without processing. In a manufacturing concern, raw materials are purchased, processed further into finished goods and then sold. Purchases may be cash purchases or credit purchases.