Commercial businesses run with the objective of earning profit, and financial transactions are the order of the day. It becomes essential for a business owner to keep a record of the business ‘income and expenditure, in order to find answers to numerous questions, a few of which are:
- Is the business earning profits or is it incurring a loss?
- How much do the parties owe the business?
- How much does the business owe to third parties?
- Can the business be expanded?
- Should a specific operation be withdrawn?
- What is total value of business assets?
These answers can be arrived at, by studying the financial information of a business operation. Thus, accounting is an integral part of any business.
Accounting is the practice of maintaining precise records of financial dealings of business. It involves identifying business transactions, recording them, and summarizing the same in such a way that important financial information can be communicated to the stakeholders of the business. Accounting is also called as language of business.
THE STAKEHOLDERS OF A TYPICAL BUSINESS CONCERN ARE:
- Investors (existing and potential)
- Lending institution
- Government authorities
To help you understand accountancy better, a few commonly –used accounting terms are explained below:
A transaction is a business activity that involves the transfer of money or money’s worth between two accounts.
A transaction can be of two types:
- Cash transaction: A cash transaction is one where money is immediately received or paid in the form of cash.
- Credit transaction: A credit transaction is one where money is paid later, but the benefits are enjoyed immediately :
Total amount of money or money worth invested in the business by owner is called capital.
Anything possessed or owned by an individual or company, which are not for usual selling or trading purpose and utilized over a of time are called assets
Liability is the amount due for the goods, services or anything taken from party or anyone is called as liability of the business.
The money withdrawn or taken something of money worth from business for the personal use is called drawings.
- Bad debts
The money which is unrecoverable from the debtor due to reason like insolvency or absconding and
A purchase is the amount of goods bought by a business for future use or for reselling. Goods purchased with immediate payment of cash are called cash purchase. Good purchase on credit are called purchase
- Purchase Return
Goods that have been purchased but are returned to the seller before consumption due to reason like poor quality and damage are called purchase return
Sales refer to the amount of goods sold by a business. Sales made against immediate payment of cash are called cash sales, Sale on credit are called credit sales.
- Sale Return
Goods that have sold but are returned by the buyer before consumption, due to reason like poor quality and damage are called sales return.
A debtor is a person who receives benefits for the business immediately, but is obligated to pay for same in future. For Example, A buyer who purchase goods form the business on credit, becomes a debtor to the business.
A Person who provides benefits without receiving immediate payment for the same, and who will claim the payment in future, is called a creditor. For Example when the business purchases goods on credit from a supplier becomes a creditor to the business
Unsold goods, raw, material, etc that lie with the business are collectively known as stock
The earning of a business its activities and operations is called revenue.