Chapter – 3 Accounting terminologies

There are some accounting terms which are daily used in business world.
Before recording the transactions it is essential to understanding these terms
as these term has specific meaning in accounting process. These basic term are
called accounting terminologies.
They are as follows
1. Transactions : business activities
2. Financial transactions: those transactions which can be convert into
monetary term.
3. Goods : those commodities which are purchased by business for re-sale.
For example furniture for furnishing house, clothes for cloth shop,
electronic items for electronic shop.
4. Business concern : those organization which are established for profit
earning motive.
5. Owner’s equity or capital : The owner of business invests cash and non
cash assets like furniture, Machinery ,land ,building for establishment of
business are called capital of business. This is liabilities for business
towards the owner.
6. Drawings : Drawings are money or money worth withdrawn by owner
from business for his / her personal use . Drawings always reduces
amount of capital.

For eg. Investment/ capital= 50,000

Owner withdraw 3,000 from business
Now capital available in business = 47,000

7. Assets : an assets are economic resources owned by the business. Those

economic resources provide future benefit to business organization.
 Classification of assets

1.current assets 2. Non-current assets

1) Cash balance 1) long – term investment
2) Bank balance 2) Tangible Fixed assets
3) Short-term investment a) Land and Building
4) Receivables b) plant and machinery
5) Inventories (stock) c) vehicle
6) Prepaid expenses d) Furniture and fixture
7) Outstanding income e) equipment
8) Debtor 3) Intangible fixed assets
Patent
Trademark
Copyright
Trade name
Goodwill

A. Current assets: current assets of business are those assets which are
expected to realize in cash or sold or consumed with in one year. They
provide economic benefit for short term that is one year. They are as
follows :
1. Cash: cash is the money in the form of currency . The benefit of cash can be
used immediately so it is current assets.
2. Bank balance: bank balance is deposited cash into bank.
3. Short -term investment:
Short-term investments, also known as marketable securities or
temporary investments, are financial investments that can easily be
converted to cash, typically within 1 years. ... Common examples of
 short-term investments include CDs, high-yield savings accounts, and
government bonds.

CDs= certificate of deposit

4. Receivable: Receivables are assets representing money due for goods or

services provided on credit. There are two types of receivables :
a) Account receivable: There is no written promise to pay due amount by
customer.
b) Bills receivable: There is written promise to pay due amount by
customer. It can be encased immediately by getting it discounted.
5. Inventory (stock): In accounting term, inventory refers to all stock in the
various production stages and is a current asset. By keeping stock, both
retailers and manufacturers can continue to sell or build items. There are
three types of inventory, inventory of raw material, work-in-progress and
finished goods.
6. Prepaid expenses: Prepaid expenses are future expenses that are paid in
advance. On the balance sheet, prepaid expenses are first recorded as an
asset. After the benefits of the assets are realized over time, the amount is
then recorded as an expense. It is current assets because its benefit is
released in one year.
7. Outstanding income/ accrued income: Outstanding income means that
amount of income which is due and receivable but not yet received. There
is a legal right to receive it immediately form the other party so it is current
assets. Accrued income means that amount which has been earned bur not
received.
8. Debtor: debtor is a person who purchase goods on credit from our
business.

B. long- term assets: Long-term assets are investments in a business

concern that will benefit the business concern for many years.
1. Long- term investment: long- term investment is invested amount in
shares, debentures, government bonds, by business organization for
long period of time.
 2. Tangible Fixed assets : A fixed asset is a long-term tangible piece of
property that a firm owns and uses in its operations to generate
income. Fixed assets are not held for re-sale purpose, they are held
by business for properly operation of business. The useful life of fixed
assets is more than one year, it means we can take benefit for many
years.
3. Intangible fixed assets: An intangible asset is an asset that is not
physical in nature Intangible assets are valued by subtracting a firm's
book value from its market value.
i. Patent: the exclusive right granted by a government to an
inventor to manufacture, use, or sell an invention for a certain
number of years. An invention or process protected by this right.
ii. Trade mark
A trademark is a way for a business to help people to identify the
products that the business makes from products made by another
business. A trademark can be a name, word, phrase, symbol, logo,
design, or picture. It can only be used on things made by the
business that owns the trademark. For example: wa-wa noodles,
mina tea, pashupati biscuit etc.
iii. Trade name: A trade name is the name which identify the makers.
For example wai- wai noodels are manufactured in Nepal by
Chaudhari group, manufacturer of lifebuoy soap is unilever global
company.
iv. Goodwill: Goodwill is an intangible asset that represents non-
physical items that add to a company's value but can't be easily
identified or valued.it is name and fame of company.
v. Copyright: copyright is right to copy granted by the government to
the owner for producing goods, publishing written materials.
9. Liabilities: Liabilities are result from some past transactions and obligation
to pay cash, provide service and delivery of goods in future time. Liabilities
are a types of burden to business.
 Classification of liabilities

A. Current liabilities B. long-term liabilities

1. Accounts payable 1. Bank loan
2. Bills payable 2. Debenture
/bond
3. Accrued /outstanding expenses
4. Unearned /advance income
5. Bank overdraft
6. Creditor

A. Current liabilities : Current liabilities are a business’s short-term

financial obligations that are payable within one year or within a normal
operating cycle. Current liabilities are typically settled using current
assets.
1. Accounts payable : accounts payable is an amount to pay supplier
for purchase of goods on credit. There is no promise written note
to pay due amount to suppliers.
2. Bills payable : bills payable is an amount to pay supplier for
purchase goods on credit but there is promise note to pay due
amount to supplier.
3. Accrued/outstanding expenses : outstanding expenses are those
expenses which incurred but not paid. It means business already
took the benefit from outsider but amount is not paid .for eg.
Salary payable, wages payable, rent payable
4. Unearned/advance income : Advance income is amount taken in
advance for delivery of goods or provided services in future.
5. Bank overdraft : bank overdraft is a types of loan provided by bank
for short-term.
 6. Creditors : creditors is a person who provided goods on credit . or
creditor is a supplier who supply goods on credit.
B. Long- term liabilities: long -term liabilities are business’s long-term
obligations that are due for more than one year.
1. Bank loan : loan provided by bank for long period of time. For that
business paid interest every year.
2. Debentures: debentures are debt collected by business from
public.
10. Revenue: Revenue is inflow of assets such as cash generated from sales of
goods or providing services. There are two types of revenue
Classification of revenue

A. Operating revenu (Generated from B. non operating revenue

Majoir business activities) ( generated from additional
1. revenue activities )
2. Service revenue 1. Interes received
3. Discount received 2. Rent received
4. Commission received 3. Dividend received

11.Income and Gain : incomes and gain is the part of revenue . it is a remaining
part of revenue after deducting concern expenses. There are two types of
gain i) revenue gain ii) capital gain
12.Expenses : An expense is the cost of an asset used by a business in its
operations to produce revenues. In other words, an expense is the use of
assets to create sales. there are classified into two groups.
 Classification of expenses

A. Operating expenses B. non-operating expenses

1. Direct expenses
i) Purchases 1. Interest on bank loan
ii) Carriage inward 2. Interest on capital
iii) Custom duty 3. Discount on bills
iv) Import duty
v) Dock duty
vi) Octroy duty
vii) Manufacturing/ factory expenses
2. Offices and administrative expense
i) Telephone charge
ii) salary
iii) rent paid
iv) Insurance paid
v) Audit fees
vi) Legal fees
vii) Printing and stationary
viii) Repair and maintenance
ix) General expenses
3. Selling and distribution expenses
i) Carriage outward
ii) Export duty
iii) Advertisement
iv) Discount allowed
v) expenses of showroom
vi) expenses of warehouses

13.loss: A loss is an excess of expenses over revenues.it do not produce

revenue, it decrease the value of capital. There are two types of loss
i) normal loss ii) abnormal loss .